Hello again after a long break in my writing here. Today I’m going to consider the state of my finances during and at the end of the 2023 year. The United Kingdom and the wider world experienced changeable markets during the year. Inflation in retail prices continued during the year but we should have now passed peak inflation. World events in Ukraine and the middle East are also impacting on trade, economics and therefore markets. This year elections will also be a factor. Within that environment I will now examine how things worked out for me.
Capital and income
I finished my last real job in December 2013 so 2023 was my tenth year of drawing down my investments to fund my financial independence. Both the capital value of my investment portfolio and the dividend income paid to me by my portfolio have increased over the ten years.
Starting from an index value of 100.00 on 31 December 2013, my capital is now 131.99, as shown in the graph above. Capital peaked in March 2022 at 141.01.
Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37 to reach 7.10 at this month end, as shown in the graph above. My current portfolio dividend income yield is 5.38%, i.e., 7.10 divided by 1.3199. Income peaked in August 2023 at 7.32 just before a property holding (later sold) cut its dividend.
In a year when despite many downs the FTSE All Share Total Return Index rose by 7.92%, my portfolio return was only 1.83%. This is a third consecutive year of underperformance against the UK market. I’m disappointed but hoping for a turning point. My capital portfolio value was down -1.89% compared to the previous year end. Portfolio income of +5.35% exceeded drawdown spending of -3.68% but capital values (share prices) fell by -3.56%. A commercial property holding I sold in September had lost 33% in the year at the point when I sold it. Allowing for the size of that holding I estimate that this loss contributed -1.22% to the total loss of -3.56%. My remaining holdings at the year-end show an unweighted average share price loss of -1.47%. The worst result was -21.32% from an Asia Pacific holding. The best result was +12.11% from another property holding after a price recovery towards the end of the year. My other holdings were within a range of -8% to +3%. These holdings are all investment trusts and will have been impacted by the widening discount on their share prices compared to their asset values.
At the year-end I held less than 1% of the portfolio in cash. On 2 January I sold shares to the value of just over 1% of the portfolio to increase my cash to 2% which covers our spending for the next six months.
In 2023 my portfolio dividend income was more than sufficient to cover our expenditure as a family of four. Spending was 69% of income in the year. Income was up by only 2% on the previous year whereas expenditure was up 15%. That meant that we spent 69% of income in 2023 compared to 62% in 2022. Income was increased by re-investing surplus income from dividends received in more shares and by some rather small dividend increases. Income was adversely affected by a dividend cut by a commercial property holding. That led me to bite the bullet and sell that holding and re-invest in alternatives that pay lower dividends that will hopefully not be reduced.
Expenditure in 2023 was significantly higher on all three of our biggest essential items compared to 2022. It was up by 16% on groceries, by 37% on council tax and by 99% on energy. These last two were partly higher because of timing factors that meant costs were lower in 2022. Moving from a standing order paid over ten months to a direct debit paid over twelve months meant more council tax was payable in 2023 even before a 15% increase was implemented by our local council. Overpayment of energy costs in 2021 when our suppliers went bust meant that 2022 was less costly than otherwise. 2023 was costly and the new normal sees our energy costs being more than double what they were only three years earlier. Our spending choices on certain items that I classify as luxury and discretionary costs increased by a massive 72%. We chose to spend more on home improvements (doors and windows), on electrical goods (TV and phones), and on furniture (sofas, table, desk, sideboard). We have lived in our house for over twenty-five years and with some of these items for nearly as long, so we were perhaps overdue to incur this spending. We also had our first overseas holiday for several years. Fortunately, the other items of our spending fell by 5%. This represents a combination of choosing to spend less or not needing to spend as much as last year. Our overall spending was therefore up by only 15% despite some expensive choices having been made.
I’m a buy and hold investor. I re-invest dividends in my tax protected accounts. Dividends in my trading account are paid out to me. I’m gradually selling the shares in the trading account to cover our spending and to fund contributions to my ISA each year. In 2023 I sold shares in January, April, August, and October to cover our spending. In April I sold shares in the trading account and bought the same shares back in the ISA. I was out of the market for two days, but the share price scarcely moved. In June I reduced my position in a UK income trust by 0.5% of the portfolio value and increased my position in a commercial property trust. In September I sold out of a commercial property trust. I used the proceeds to add to two other existing commercial property trust holdings. The trust sold had previously reduced its dividend in 2020 and that contributed to my decision to halve my position in February 2021. With hindsight I now think I should have sold it all then. After it reduced its dividend again in September 2023, I finally sold the remainder of my shares. In the time between the two sales the share price halved whilst the alternative I bought in 2021 went up 15%. I’m a buy and hold investor but sometimes you need to sell. Overall portfolio turnover was below 8% in the year.
The table below shows the composition of my portfolio at the end of the month. Over the year the share of income contributed by UK and Asia Pacific has increased and that of property has fallen. My highest yielding holding is now in the Asia pacific sector. This was my worst performer in the year, of those still held at year end. I may consider reducing my position on that one this year. My plan to switch towards more growth holdings has stalled this year, although I currently have 16% of the portfolio in such holdings, compared to 22% in high income holdings. I have fourteen holdings and I may consider increasing or reducing that number during the year. I could increase my position in UK small company trusts or add a new position in a global income trust that pays out income from capital growth. The first option would suit any recovery in the UK, whilst the second option would give exposure to some of the large US tech companies that have had a good run this year.
I think I have stayed minted in 2023 despite spending more and my share prices falling because I had a good margin of unused income at the start of the year. I have, however, done less well than I might have in that I have underperformed the UK stock market. I will hope for a turning point in my favour in the markets and also consider some portfolio changes.