It is now one month after the recent stock market low point on 19 March. I am still more concerned about health matters than financial matters. Tomorrow I will again be concerned and distracted by our children’s home school. I’m still taking stock of the situation we are in and my financial thinking is concerned with surviving this, hopefully, short term crisis. This post records my current thinking.
Based on values at the close on Thursday 19 March my portfolio had fallen by 41.76% this year of which only 0.86% was draw down spending. One month on and based on values at the close on Friday 17 April my portfolio had fallen by 24.51% this year of which only 1.00% was draw down spending.
I have also now received some inherited funds following a recent bereavement. Allowing for the uplift from that I am down by 12.31% since the turn of the year.
When I was 41.76% down, I would have needed an increase of 71.70% to recover. This reflects that if there is a 50% fall then you need a 100% increase to recover. Since that low point the increase has been 29.62%. A further increase from current values of 32.46% would complete the recovery. I worry, however, that we may see more of a decrease before we see such a further increase. The flow of news and the market reactions to come are unpredictable.
At a trust level some of the volatility has been extreme with falls of up to 63% from a twelve-month high being followed by rises of up to 105% as at Friday, when looking at daily prices over the last four months. If you are reasonably confident of your investment approach it is probably best not to look too closely at such daily movements. I look most days, which is more often than I should, but I don’t feel compelled to re-act. Rightly or wrongly, I have remained mostly passive in the markets since 10 December 2019 when I last sold shares and withdrew cash just before the election. I’m still considering reducing my high yield bond and commercial property exposure by switching to equities in my ISA. I am watching to see what will happen on dividend payments.
My current liquid cash position, my cash bucket, is enough cash to cover eight months of spending at current levels or twelve months if I reduce spending. The spending reductions would include some of the things we can’t do at present such as holidays and meals out. They also include cutbacks on discretionary spending on the house and on clothes which can be postponed. Investing in the children’s Junior ISA’s, which I record as spending, could also be reduced or stopped temporarily. I think some of these reductions will happen because of the lockdown and others I will need to decide to implement. I don’t propose to reduce other discretionary spending or charitable donations.
My non-ISA held shares are now paying out all their dividends to me. If these dividends are maintained at current levels then one year’s dividends from them will cover four months spending at current levels or seven months if I reduce spending. I reckon I can therefore avoid selling any shares or taking any dividends from my ISA for over twelve months, and maybe for nineteen months.
I may, however, choose to raise more cash now at current prices so I can increase my cash bucket to cover another three or four months of spending. This would mean selling about 1% of my portfolio. Being 97.36% invested in equities, high yield bonds, and commercial property is maybe a bit aggressive in the currently volatile markets. I should maybe raise some cash now that share prices have recovered some ground.
Dividend payments are endangered in the current situation which threatens my commitment to a natural yield approach to a safe withdrawal rate. It may be that the dividend hero investment trusts, both actual and aspiring, that I am invested in will hold firm and use their revenue reserves to make up for dividends being cancelled or reduced by the companies they hold. This seems likely if the dividend downturn lasts for only one year. Studies have shown, however, that a second year of falling company dividends would be challenging even for some of the dividend heroes. Since 2013 my spending has been below the dividends I have received. It may be that in 2020 or 2021 my dividends will fall below my spending. In the short term I can cover any shortfall by spending cash from my cash bucket.
I still believe in stocks for the long run and on that basis, I will stay near enough fully invested and mostly in equity income investment trusts invested in the UK, Asia Pacific, and global sectors. I will continue to roll with the punches as thrown by the markets. As a short-term measure, I am likely to raise cash to top up my cash bucket by selling some investments from my non-ISA holdings. What happens on dividend payments may lead me to reduce or sell off the commercial property and high yield bond trusts in my ISA. This is my short-term thinking.