Returning to normal?

Source: Pixabay

Tomorrow there are changes being made to the lockdown as the UK tries to return to normal life in the wake of the coronavirus having peaked. Personally, I’m generally in favour of steps being taken by government to relax the lockdown but I also favour being cautious in the steps we as a family take. Some schools and school years are returning to their school buildings but our current expectation is that our children will remain in our home school until September, so that’s a step we don’t get to consider yet. In the meantime, our focus will continue to be on supporting home school and surviving as a family in this ongoing health crisis situation. This leaves less time to consider how best to maintain financial independence in the face of an emerging financial crisis. I like to think we have things in reasonable order financially. We have no debts, we have sufficient cash in the bank to cover our expenditure for the next few months, and we have an equity portfolio paying out regular dividends.

A quick look at our spending in the first two months of lockdown compared to the same month’s last year suggests a 10% reduction. We have spent less on things we can’t have or don’t need right now such as holidays, dining, drinks, entertainment, petrol, travel, more clothes, and more furniture. We haven’t spent any actual cash coins and notes. We have spent a little bit more on groceries and books. Fortunately, we only had one holiday booked and paid for and that has been postponed by twelve months. We can’t contemplate booking other holidays or spending on the house at this time.

During the past five months, as the portfolio fell by 41.76%, I managed to stay calm and not sell any of my equity shares. I was trying to keep my head as others lost theirs, but also, I hadn’t been clever enough to sell anything before the market fell significantly. Eventually in late April I did sell shares to the value of about 1% of my portfolio. In not selling at the lowest point I got 32.87% more cash for my shares, albeit I got 23.55% less than I would have at the end of last year.

My share sale should cover about three month’s spending. This sale was made to increase my available cash and followed the partial recovery in stock markets. At the moment I have cash to cover eleven month’s spending. That gives me some comfort. I have more time in which to choose when to raise more cash. I am currently taking the dividend payments on my non-ISA investments and these should now cover about five month’s spending each year. I would previously sell about 1% of the portfolio every three months but I can probably delay that for up to sixteen months if I choose to.

Markets have been relatively stable since mid-April. My portfolio has reduced by 23.52% in the year to date. I would need an increase of 30.76% to restore the year end position. This reduction includes only 1.24% of draw down expenditure over five months, which implies an annual withdrawal rate of around 3%.

After allowing for the receipt of some inherited funds I am actually only 11.07% down since the start of the year.

There has been quite a variation of share price movements in the year to date from my investment trust funds from a best of -7.78% to a worst of -49.32% and a simple average of -25.07%. That worst performing trust, which is in the UK equity income sector, may be sold and a replacement bought. I could choose another UK trust or switch to the international or Asia Pacific sectors. I could choose to seek a similar dividend yield which restricts my options, or I could accept a lower yield. I’m considering my options for now.

My commercial property trust has fallen by 31.80%. That may also be sold because analysts are suggesting that it will reduce it’s dividend by about 30%. That would reduce total portfolio income by about 4%. I could switch some or all of my holding into my high yield bond fund and accept about a 13% reduction rather than that 30%. Alternatively, I could switch to equities and accept a 40% reduction rather than the 30%. I’m considering my options on that too. For now, none of my holdings have declared a reduced dividend. I’m maybe too keen on dividends but may have to opt for a lower portfolio income before one is imposed on me by dividend cuts. It’s difficult to consider switching to avoid one dividend cut and maybe receive a different dividend cut from what you buy.

After switching to a more international portfolio (“going global”) last year I currently have around 40% in UK equities and about 40% in global and Asia Pacific equities, with property, bonds and cash making up less than 20%. The international holdings, the bonds and the higher quality UK holdings have performed best this year. The property, and the more value orientated UK holdings have performed less well.

Yield %Capital %Income %
Asia Pacific6.0522.2322.47

I can now see me moving away from a high yield income growth investment approach towards more of a total return approach although this will likely take some months and years to evolve. As mentioned, I may switch to lower yielding trusts to avoid further poor performance and possible dividend cuts. My current portfolio income exceeds my requirements. I am reluctant to see that income fall but I don’t need it to rise necessarily. As dividends are increased (hopefully) I can switch more into lower yielders. Where my re-invested income exceeds my share sale proceeds, I can use that to switch to lower yielders. Holding such lower yielding investments will hopefully enable me to benefit from better share price growth.

It is still my assumption that I will not face significant dividend cuts because of the revenue reserves held by my dividend hero investment trusts.

5 Replies to “Returning to normal?”

  1. V interesting. On the investment trusts, I agree that the ones who have been paying a dividend for many years will do what they can to avoid cutting their dividend. Its one of their biggest marketing messages. Of course there’s no free lunch. They’ll have to raise the cash to cover the shortfall by selling equities or more likely raising gearing. So you could do the same with an index tracker and borrowing money or selling shares. As far as I can tell investment trusts do nothing much to add investment value (if you believe active fund management is a zero sum game) but do offer the ‘smoothing of income’, which is an incredibly powerful psychological force to the average UK investor (me included once upon a time). Plus they do use leverage, which can help increase returns over the long run. I appreciate the tough situation you are in. The UK is a cheap market from a CAPE perspective. Switching to a global mandate means investing in the US, which is expensive and low yield. It maybe they under perform or not. I haven’t a clue, I just diversify myself and take the global returns. I do think the vanguard life strategy (which I do own) could be a nice half way house for you. Still over allocated to the UK but globally orientated otherwise in a passive / low costs manner. The other elephant in the room, sadly, is I suspect you are over consuming the portfolio hence the psychological desire to reach for yield, which creates concentration risk. The 4% rule was created in an environment of higher interest rates. It may work in the future but to be sure, the future is not the past. The fact that annuity rates for someone of your age (55 ish?) are sub 2% should be flashing large warning bells for anyone consuming 4% I feel. That’s not a pretty pill to swallow so feel free to ignore but better to think about it now than in the future. Presumably the state pension may help.

  2. Thanks for your feedback. You raise topics that I could write a whole post about, such as Vanguard trackers versus active investment trusts, and annuity rates versus natural yield. I have previously written about the 4% rule versus natural yield, and home bias versus going global, but they can be re-visited perhaps. I’ll be considering these topics.

  3. Firstly, thank you for continuing to share your journey through this difficult period.
    AFAICT, your current portfolio (minus inheritance) is worth c. 93% of your starting value, ignoring inflation, or c. 84%; using CPIH to April 2020. Including the inheritance, the figures are c. 109% and c. 99%. And this is after you “pulled the plug” some 6.5 years ago. So ……….
    However, as Dirk Cotton explains (see “Anything that happened before reaching the current state is no longer relevant” and all that really matters is how you go on from here.
    I wish you well as you re-shape things going forwards.

  4. Thanks for your comment and for the link. My view is that what has happened before is useful to me in shaping my long term thinking, although I accept it may not be directly relevant to this difficult period. In the short term I’m focused on how my dividend income holds up (or not) and how much cash I hold.

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