Short term thinking

Source: Pixabay

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.

9 Replies to “Short term thinking”

  1. I’ve got investments in some of those investment trust dividend heroes and as I don’t currently rely on their income to live on, I hope that they won’t risk trying to keep their hero status at great cost.

    I haven’t considered selling out of anything yet, things are still too up in the air for any decisions to be made.

    But like you, I do believe in stocks in the long run and I will remain pretty much fully invested.

  2. Thanks for your comment. I think in the next year the dividend heroes will rely on the revenue reserves they have accumulated in order to sustain and increase their dividends. The year after that could involve more risk.

  3. Thanks for commenting. I read what Monevator had to say. The important thing for me is that I have confidence that the actual or aspiring dividend heroes in my portfolio will increase or at least maintain their dividend through a downturn for one or two years. That gives me the option of taking their dividends so I don’t have to sell any shares.
    As they have a stated revenue reserve they know that they may have to sell any of that reserve they have invested in shares if needs be. It appears to me that a typical UK equity income trust with a 6% yield may have to take about one third of that from it’s revenue reserves in what is an exceptional year. I’m OK with that. I don’t agree with trusts using capital to increase dividends routinely every year.

  4. I think the fundamental issue with your portfolio and indeed anyone who tilts away from the market, e.g. yield, small-cap, large-cap, growth, value etc etc is they are taking a view on the market. Effectively they are saying they expect their portfolio to perform better than the market – if you are saying that’s not the case then are you saying you think it will under-perform? If so that’s irrational behaviour (I am sure you are not saying that!). It’s rationale to say I chose this portfolio because I think it will outperform (but it may not). In your case (and btw this to an extent is a road slightly travelled for me also so my hands are a bit dirty too), you are orientating yourself to yield stocks and the UK (4% of world stock markets). You are saying that my portfolio is a better bet than the global portfolio – for example you are eliminating technology stocks (largely from your portfolio). It would be worth looking through to your underlying stocks and seeing just how many stocks you are not invested in (do you have diageo or amazon or pfizer for ex). I would bet you are very underweight the US, which is a massive call. BTW – I want to be clear, I am not saying you are wrong. Your call may be right, but its important to understand that you are making a substantial call on the market – perhaps without even realising it. On the basis that nice yielding stocks are safe – when the pandemic today and the 2008 crisis etc has shown (in this case) that yield stocks are anything but safe – they are not. I would think a global index is a better bet and over the long term actually safer – much simpler, spend the lower dividend yield and perhaps a little extra if you have to. I used to buy income stocks on a similar thought process a while ago until I realised the above. Just my 2 cents!

  5. Thanks for your 2 cents. I would hope that my portfolio will perform better than a UK FTSE All Share index tracker fund over the long term. I am expecting that my portfolio will under-perform a global or US index tracker fund whilst the US technology stocks are doing so well. I have made a conscious choice to prioritize income and income growth and after six years I was satisfied that my portfolio income yield was 4.7% and my income was compounding at about 8% per annum. I did indicate in my year end review that I expected to move towards more of a total return objective in the years ahead. That move may now be hastened by what happens with my investment trust dividend receipts over the next couple of years.
    https://gettingminted.com/financial-review-at-31-december-2019/

    • To follow up on this. Take a look at Vanguard Life Strategy 100% Equity fund and review the dividend growth over the past few years. It is very significant. Now for sure it has benefitted from (a) falling £ to $ (b) decade of cheap money and it (c) it still has 25% weighting to the plus (d) next year may be lower growth or even fallen depending on outcome of what has happened this year but the outlook for dividends seems much better than in UK income trusts / commercial property trusts which are highly concentrated. For sure the yield is much lower – circa 2% but it is likely more sustainable and will have a better growth profile given you also have stocks that have a growth outlook. I like the fund because of the 25% weighting to the UK which is a cheap market – although I am probably wrong on that score.

      https://www.vanguardinvestor.co.uk/investments/vanguard-lifestrategy-100-equity-fund-income-shares/distributions

  6. Thanks for commenting again. I will have a look at that. As mentioned in my latest post (today) I am going to look to put less emphasis on income and more on growth in future.

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