Five years on

Source: Pixabay

Five years on from that vote and many things have happened – or not happened – and many of those things have no connection to that vote. We’ve had an economy in lockdown for fifteen months, together with additional government spending and continuing low interest rates. We may be about to emerge from lockdown and markets have, I think, anticipated much of that.

I chose five years ago to ignore the noise that emerged after that vote and continued with my existing income growth approach with high UK exposure and some Asia Pacific and global exposure too. During the five years I did build up investments in UK high yield bond trusts, and UK high yield commercial property REIT’s, in order to increase my portfolio income. Later on, I increased my Asia Pacific and global equity holdings and reduced my UK equity holdings. I managed to also ignore the noise around the lockdown of the economy last year and stay invested and on my chosen path. Now I am very slowly switching from equity income holdings to small company growth holdings whilst keeping my income at around the current level.

I thought it would be an interesting time period to review. My key performance indicators in this five-year review are capital, investment income versus household expenditure, and total return. My key comparisons are with a UK equity index, a UK tracker fund, and a UK inflation index,

Capital

My capital has increased by 44.62% as shown in this table and graph.

 CapitalInheritedCapital GrowthInvestment IncomeExpenditure
31-May-16100.00
31-Dec-16111.660.0011.922.14-2.40
31-Dec-17122.560.0010.144.84-4.07
31-Dec-18110.630.00-12.885.11-4.17
31-Dec-19128.190.0016.335.62-4.39
31-Dec-20132.7414.57-12.626.70-4.10
31-May-21144.620.009.983.55-1.65
14.5722.8827.96-20.79

[as % of May 2016 assets]

This increase is 30.05%, if the inheritance is deducted. That is higher than the 17.10% increase in the FTSE UK All Share capital return index, and higher than the 15.19% increase in RPI inflation.

Income versus Expenditure

Expenditure as a percentage of investment income, as taken from the above table, gives these results.

 Spend %
31-Dec-16-112.39
31-Dec-17-84.14
31-Dec-18-81.54
31-Dec-19-78.10
31-Dec-20-61.24
31-May-21-46.55
5 years-74.35

Overall spending was 74.35% of investment income over the five years. 2016 and 2021 are part years, seven months and five months respectively, so they produce unusual spend percentages because my income and expenditure don’t fall evenly across the year. The overall trend is for the spend percentage to fall from over 85% to about 60%, mainly because of increasing income and stable spending.

Total return

My total return measure starts at 100.00 on 31 December 2013 and uses a chain of annual or part year calculated total return percentages. Total returns between that start date and 31 May 2016 were a disappointing 3.60%.

[Total Return = (ending balance – ½ contributions + ½ withdrawals) divided by (beginning balance + ½ contribution – ½ withdrawals) minus 1 ]

 Total ReturnIndexTrackerRPI
31-May-16103.605,580.19106.48262.1
31-Dec-16118.246,424.25121.55267.1
31-Dec-17134.397,265.66137.11278.1
31-Dec-18125.726,577.39124.84285.6
31-Dec-19151.177,837.96147.65291.9
31-Dec-20144.467,068.59133.01295.4
31-May-21159.287,840.17147.16301.9

For comparison purposes my chosen equity index is the FTSE All Share total return index. After five years the FTSE UK All Share total return index has increased by 40.50%. A typical unit trust tracker fund (M&G Index Tracker Fund Sterling A Acc) attempting to track the index had a total return of 38.20%. This is lower because of fees and tracking errors. My chosen inflation index is the retail price index. Between May 2016 and May 2021, the RPI index has increased by 15.19%.

I calculate that my portfolio total return has been 53.74%. That is a compound annual growth rate of 8.98%. This exceeds the returns from both the FTSE All Share total return index and from the M&G Index Tracker Fund Sterling A Acc, and exceeds RPI inflation.

 Total Return %Index %Tracker %RPI % 
31-May-16
31-Dec-1614.1315.1314.151.917 months
31-Dec-1713.6613.1012.804.12
31-Dec-18-6.45-9.47-8.952.70
31-Dec-1920.2419.1718.272.21
31-Dec-20-4.44-9.82-9.921.20
31-May-2110.2610.9210.642.205 months
5 years53.7440.5038.2015.19

Nevertheless, the UK stock market has lagged the rest of the world, according to new research by Interactive Investor. Between 23 June 2016 and 11 June 2021, the MSCI Europe ex UK index had total returns of 85%, which was bettered by the MSCI World index returned (104%) and the US’s S&P 500 index (132%). The UK indices had total returns of 40% (FTSE All Share), 37% (FTSE 100) and 49% (FTSE 250). With that hindsight going global would have been the way to maximise total returns if that was your main objective. Being focused on income growth, and thinking that the US was too expensive, it was never an option for me.

Conclusion

I am content with the returns I have made that have beaten my chosen benchmarks. I know I have underperformed against international indices and against portfolios heavy in US and technology holdings. I was not, however, aiming for all out growth. I was mainly seeking income growth, with capital growth as a secondary objective. As my strategy evolves and as my portfolio becomes more focused on small company growth holdings and perhaps more international exposure, I may need to consider a different or additional benchmark in future.

In the year 2021 (May)

Source: Pixabay

Here is a late update on my portfolio for the previous month of May.

Investment changes

I made no changes in May. Dividends received were paid out or re-invested as usual. In early June I sold further small slices of my holdings in UK and Asia Pacific equity income investment trusts and added to my holdings in UK and Asia Pacific smaller companies’ investment trusts as part of my re-positioning from income to growth. In the three months since mid-March, I have built up a position of about 3% in smaller companies trusts that target growth.

May

The FTSE All Share Total Return index, my chosen benchmark, went up by 1.1% in the month, and it was up by 10.9% for the year to date. My investment return for the year to date was a rise of 10.26%, including 1.86% in the month. Ahead of the index for the month but behind the index for the year so far. My individual holdings recorded share price movements for the year so far ranging from a loss of -1.09% to a gain of 21.88% with an unweighted average result of a gain of 9.32%.

Capital


I have tracked my portfolio value at each month end since 31 December 2013, taking an index value of 100.00 as the starting point. This capital measure 138.41. At this month end, the capital value of my investment portfolio is at a new peak and is up by 8.95% since the end of the 2020 year. Investment returns, growth and income, were 10.20%, and draw down expenditure deducted -1.25% for the year to date.

Income

I have tracked the annual level of my dividends received since 31 December 2013. The annual dividend income as a percentage of the opening portfolio value has increased from 3.37% on 31 December 2013 to reach a new peak of 6.68% at this month end. This measure will be reduced slightly at the end of June because of the investment changes mentioned above.

Portfolio income has increased by 3.20% in the year to date. That is a 98.36% rise since draw down started on 31 December 2013. Increases in income arise from the re-investment of dividend income in more shares, from dividend increases announced, and from portfolio changes. Going forward any increase is likely to be small because increases arising from re-investment and increased payments are likely to be matched by decreases from portfolio changes as I reduce higher income holdings and increase growth holdings.

Cash

My annual drawdown spending is now around 3.26% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are sufficient to cover about nine months of spending. In addition to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments every few months in order to cover spending and to keep a small cash reserve.

Expenditure

Draw down expenditure was only 59.44% of my portfolio income for the last twelve months. This compares to draw down spending being 70.77% of my portfolio income in the previous twelve months. Portfolio income has risen by 17.96% whilst expenditure has fallen by -0.94%. The increase in income includes inheriting extra capital in April last year, and the continued effect of dividend reinvestment, dividend increases, and portfolio changes. The impact of lockdown restrictions on expenditure is no longer evident now that both years include periods of lockdown.

Conclusion
In the last three months I have added to my growth holdings. Going forward I aim to use further increases in portfolio income as an opportunity to continue this switch by reducing my higher income and income holdings and increasing my growth holdings.

Going for growth

Source: Pixabay

I’ve had my second jab today, with no side effects so far, and I am feeling more optimistic for the future. It’s interesting that nearly 24 million people in this country are older, less healthy, or otherwise more entitled to a second vaccination than me. I’ve enjoyed a couple of indoor pub drinks with friends and a family meal in a restaurant in the last ten days. That’s nearly normal apart from the wearing of masks when you are not sat down. Britain’s economic prospects are being talked up by some pundits, stock markets are holding up, and as of yesterday my portfolio is inching nearly back to pre-pandemic levels, and is about 1% ahead in the month to date.

Here is a late update on my portfolio for the previous month of April.

Investment changes

In early April, in the old tax year, I sold investments in my dealing account and then, in the new tax year, I re-invested that cash in my ISA. I sold one UK equity income trust and bought another one with a slightly higher dividend yield. In late April I sold a slice of one of my Asia Pacific income investment trusts and bought shares in an Asia Pacific smaller companies investment trust that will target growth rather than income. That represents 0.76% of the portfolio and is a second small step in re-positioning away from high income towards growth.

April

The FTSE All Share Total Return index, my chosen benchmark, went up by 4.3% in the month, and it was up by 9.7% for the year to date.

My investment return for the year to date was a rise of 8.25%, including 3.96% in the month. Lagging the index slightly. My individual holdings recorded share price movements ranging from a loss of -0.15% to a gain of 18.92% with an unweighted average result of a gain of 7.79%.

Capital

This capital graph shows the portfolio value at each month end since 31 December 2013, taking an index value of 100.00 as the starting point. This capital measure on the graph is now at 136.2. At this month end, the capital value of my investment portfolio is at a new peak and is up by 7.21% since the end of the 2020 year. Investment returns, growth and income, were 8.21%, and draw down expenditure deducted -1.00% for the year to date.

Income

I have tracked the annual level of my dividends received since 31 December 2013 as shown in the income graph. This income graph shows the annual dividend income as a percentage of the opening portfolio value. My income has increased from 3.37% on 31 December 2013 to reach a new peak of 6.67% at this month end.

Portfolio income has increased by 3.02% in the year to date. The income measure on the graph rose to 6.67%. That is a 98.02% rise since draw down started on 31 December 2013. Increases in income arise from the re-investment of dividend income in more shares, from dividend increases announced, and from portfolio changes. Going forward any increase is likely to be small because increases arising from re-investment and increased payments are likely to be matched by decreases from portfolio changes as I reduce higher income holdings and increase growth holdings. The two small switches made so far have sacrificed income growth of about 1.25%.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by sector, that is by geography for equities, or by type for non-equities.

 Yield %Capital %Income %
UK4.3040.0035.14
Asia Pacific4.7823.8123.24
Global4.2019.3316.60
Bonds8.267.6612.92
Property8.137.2312.01
Cash0.221.980.09
4.89100.00100.00

I have also analysed based on the income and growth characteristics of each holding. I have classed my holdings as high income (dividend yields greater than 5%), as income (yields between 4% and 5%), as growth and income (yields between 3% and 4%), and as growth (yielding less than 3%). I am aiming to gradually reduce my investment in high income and income holdings and increase my investment in growth holdings. The latter have risen from 7.81% of capital in February to 9.49% of capital now, as a result of the two small steps taken so far.

 Yield %Capital %Income %
High Income7.0034.9950.07
Income4.4939.3836.15
Income & Growth3.5714.1610.33
Growth1.739.493.36
Cash0.221.980.09
4.89100.00100.00

Cash

My annual draw down spending is now around 3.26% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are sufficient to cover about eight months of spending. In addition to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments every few months in order to cover spending.

Expenditure

Draw down expenditure was only 60.12% of my portfolio income for the last twelve months. This compares to draw down spending being 73.88% of my portfolio income in the previous twelve months. Portfolio income has risen by 16.43% whilst expenditure has fallen by -5.24%. The increase in income includes inheriting extra capital in April last year, and the continued effect of dividend reinvestment, dividend increases, and portfolio changes. The expenditure comparison is mostly one of pre-lockdown and lockdown. The fall in spending is mostly a result of lockdown restricting spending opportunities. Spending this April was higher than last April leading to a slight worsening of the position since the previous month. Spending increased as lockdown was eased this April compared to last April, but also a new washer dryer was purchased in the month.

Conclusion

In the last two months I have added to my growth holdings which are now 9.49% of my portfolio. Going forward I aim to use further increases in portfolio income as an opportunity to continue this switch by reducing my higher income and income holdings and increasing my growth holdings. This will be stalled by any dividend cuts, but I am hopeful that this will not happen.

House prices then and now

Source: Pixabay

My brother sent me an email headed “To bring back memories of the 80s and your first flat/property.” It included a link to the place where I bought my first property that showed a studio flat, like mine, for sale. “Offers Over £175,000” were being sought.

I responded “That’s a 600%+ price rise! I read that Nationwide now offer 5.5 x salary! You would need to be on £28,000 per annum and have a £21,000 deposit, plus money for any other costs. So daunting, but not impossible.”

A quick bit of research had shown me that the current rate for my first job might now pay £28,000 per annum and thereby could allow a £154,000 mortgage. In this case, to buy a starter home for a single person now would need a mortgage of 5.5 x salary and a deposit of 0.75 x salary based on that salary which was close to the average. It looks to me like the increase in salary plus the increase in the mortgage multiple since the 1980’s has allowed this house price rise to happen. The higher multiple is possible because of lower interest rates today. Are more expensive houses the result of money being cheap? Will we see cheaper houses without seeing more expensive money first?

Browsing online today I see that Politics for all have tweeted on 12 May:

NEW: UK average house prices compared to average salary
House building House Prices / Salary
1970: £4000 / £1000
1980: £20,000 / £4000
1990: £60,000 / £10,000
2000: £85,000 / £16,000
2010: £170,000 / £23,000
2020: £230,000 / £28,000
Today: £260,000 / £30,000

The ensuing debate mentioned:
• interest rates being higher in the earlier years and lower now
• London and regional differences in house prices and salaries
• mostly single earners in the earlier years but now two earners
• the deposit size is the bigger hurdle now
• the accuracy of the average salary or whether a median or mode should be used

My starting salary and first (and second) property price in the mid-1980’s sit between the 1980 and 1990 figures in that table.

Back then in the mid-1980’s I had borrowed just under 3.0 x salary and put down a deposit of just over 0.5 x salary. In my early 20’s I was on a reasonably good starting salary that was below the average salary but I was confident that it would rise. I made sure to borrow less than 85% of the property value so I didn’t have to pay mortgage indemnity insurance that would have only benefited the lender. I had some money I had inherited at ages 18 and 21 and my parents topped that up so I had enough for the deposit. Without that help I would have needed a 90% to 95% mortgage and a multiple of 3.0 to 3.25 x salary. That would have been possible but more difficult to arrange at that time.

Back then mortgage interest was 12% but had increased to 14% before I even moved in. Mine was a new build so the builders gave buyers a little money back in response to the interest rate rise to encourage us to go ahead. The interest rate meant that I was spending about 40% of my take-home pay on the mortgage. That percentage fell as my pay increased. I owned that flat for three years and only paid back 1.5% of the mortgage advance. Putting it another way about 95% of my payments were interest.

My attitude then, just a few weeks into my first job, was that if I could do this then I should do it. Property prices were rising fast so the opportunity might be lost. I don’t remember thinking much about the risk of interest rates rising. The idea of the property price falling below the value of the mortgage and being in negative equity was unknown to me then. I also didn’t think about the possibility of losing my job or wanting to relocate. I was young, naïve but optimistic.

If I was in my early 20’s and in my first job now I’m not sure what I would do. If I could buy a property, should I? I suspect that my starting salary now in 2021 would be below the average rate for the job according to my Google search so I wouldn’t be able to move so quickly. I would maybe need to work for a couple of years. That would have given me more time to consider the situation. I think there is more information available now, via the internet, so I could be more informed about the issues. I could consider whether prices are at a high, and whether interest rates are at a low. Would I consider the impact of a possible change of circumstances such as losing my job, or wanting to relocate? Would I consider the risk of being trapped at the bottom of the housing ladder? I could be less young and less naïve but how optimistic would I be? I was optimistic back in the mid-1980’s despite being unemployed after graduating and struggling to get that first job!

Buying a first property because I could do it worked out OK for me back then, but I only realised how risky that was long after the event. Now I suspect that more time and more information would make me more cautious.

Changes made

Source: Pixabay

This is a late update on my portfolio for the month of March including some detail on actions taken in March and April.

Investment changes

In March I made a few changes. Firstly, I sold some shares, about 0.79% of my portfolio, to raise my cash levels. That covers about three months of drawdown spending. That was my first sale to raise cash since April last year. Secondly, I sold an investment held since 2007 and bought a very similar one in order to realise some capital gains. These should match against some capital losses incurred on some shares sold in April 2020. I therefore expect to pay little or no Capital Gains Tax for the year. The Chancellor hasn’t increased Capital Gains Tax rates yet but I suspect he will do that in the future. I am therefore pleased to have reduced my taxable gains. Thirdly, I sold a slice of one of my UK high income investment trusts and bought shares in a UK smaller companies investment trust that targets growth companies. That represents 0.86% of the portfolio and is a first small step in re-positioning away from high income towards growth. Fourthly, in early April in the old tax year I sold investments in my dealing account and then re-invested the cash in my ISA in the new tax year. Overall, I increased my portfolio income despite raising cash and switching to a smaller companies’ growth fund because the other two switches were to slightly higher yielding trusts.

March

The FTSE All Share Total Return index, my chosen benchmark, went up by 3.98% in the month of March, and it was up by 5.19% for the opening three months of the year.

My investment return for the first three months of the year was a rise of 4.13%, including 4.61% in the month of March. Lagging the index slightly. My individual holdings recorded share price movements ranging from a loss of -5.70% to a gain of 10.96% with an unweighted average result of a gain of 3.43%.

Interestingly an investment platform is saying that their average investor returned 2.91% in Q1 of 2021. They add that returns got better as their customers aged, rising from 1.78% for the 18-24’s to 3.21% for those aged over 65 (ii Private Investor Index).

Capital

This capital graph shows the portfolio value at each month end since 31 December 2013, taking an index value of 100.00 as the starting point. This capital measure on the graph is now at 131.40. At the end of March 2021, the capital value of my investment portfolio is at a new peak and is up by 3.43% since the end of the 2020 year. Investment returns, growth and income, were 4.11%, and draw down expenditure deducted -0.68% for the three months.

Income

I have tracked the annual level of my dividends received since 31 December 2013 as shown in the income graph. This income graph shows the annual dividend income as a percentage of the opening portfolio value. My income has increased from 3.37% on 31 December 2013 to reach a new peak of 6.66% at 31 March 2021. This now exceeds the previous peak of 6.58% in July 2020 by 1.20%. The portfolio income has now recovered from the dividend cut last August by a property REIT but I remain concerned by the possibility of future dividend cuts. My two property REIT’s and my bond fund are perhaps most at risk. My UK equity income trusts are now using up their revenue reserves in order to maintain their dividend hero status. That can only be sustained for perhaps a couple of years so they will need company dividends to increase again in that time.

After three months of the year portfolio income has increased by 2.98%. The income measure on the graph rose to 6.66%. That is a 97.94% rise since draw down started on 31 December 2013. The increases this year were the combined result from the automatic re-investment of dividend income in more shares, from dividend increases announced, and from portfolio changes.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by sector, that is by geography for equities, or by type for non-equities.

 Yield %Capital %Income %
UK4.4639.6534.84
Asia Pacific4.9324.2623.61
Global4.2819.6916.61
Bonds8.687.5612.93
Property8.866.8211.91
Cash0.232.020.09
5.07100.00100.00

I have also analysed based on the income and growth characteristics of each holding. I have classed my holdings as high income (dividend yields greater than 5.5%), as income (yields between 4% and 5.5%), as growth and income (yields between 3% and 4%), and as growth (yielding less than 3%). I am aiming to gradually reduce my investment in high income holdings and increase my investment in growth holdings.

 Yield %Capital %Income %
High Income7.2834.7949.94
Income4.5938.8935.19
Income & Growth3.7415.7711.64
Growth1.868.533.13
Cash0.232.020.09
5.07100.00100.00

Cash

My annual draw down spending is now around 3.28% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are sufficient to cover about eight months of spending. In addition to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments every few months in order to cover spending.

Expenditure

Draw down expenditure was only 57.35% of my portfolio income for the last twelve months. This compares to draw down spending being 75.58% of my portfolio income in the previous twelve months. Portfolio income has risen by 22.47% whilst expenditure has fallen by -7.06%. The increase in income includes inheriting extra capital in April last year, and the continued effect of dividend reinvestment, dividend increases, and portfolio changes. The expenditure comparison is mostly one of pre-lockdown and lockdown. The fall in spending is mostly a result of lockdown restricting spending opportunities.

Conclusion

I have now started to add to my growth holdings which are now 8.53% of my portfolio. Going forward I aim to use further increases in portfolio income as an opportunity to continue this switch by reducing my higher income holdings (now 34.79% of my portfolio) and increasing my growth holdings. I may choose to stall this switch if I face further dividend cuts.