I am now asking myself whether I have been too complacent, or even smug, about my financial position. Was my portfolio as well positioned as I thought it was? I think it was the boxer Mike Tyson who said that everyone has a plan until they are punched in the mouth. I have been punched by a 40% fall in net worth this year, and most of that in the last month.
I’m mostly a buy and hold investor with portfolio turnover of less than 10% per year. I have not tried to trade out and back in through volatile markets. I have invested predominantly in equity income for nearly fifteen years, and watched my portfolio income rise steadily. I have diversified from the UK to add global and Asia Pacific investment trusts, and then to add corporate bond and commercial property investment trusts.
The two graphs tell a different story – or I hope they do! Since taking my leave of the workplace I have managed to achieve a large increase in the income produced by a mostly equities portfolio. At the same time that portfolio has shown a steady, but less rapid, rise in value punctuated by times of volatility where values fall and rise again. Now, can I believe that the income will hold up when portfolio values have taken a steep dive akin to that of a jump off a diving board?
Things have moved so fast that my ruminations and calculations on whether to re-position were overtaken by such extreme daily price movements that I have decided to sit tight for now at least. I believe in staying invested to get the income and to capture the price growth, when it happens. I had considered reducing my exposure to my two highest yielding investment trusts – one in high yield bonds, and one in commercial property – by diversifying to other trusts in those sectors, but had done nothing. Looking back at the past month that would have made at best a marginal difference.
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. The value of that fall exceeds all the money I saved into the portfolio over a near thirty-year career, but I am left with most of the growth on those savings, at the moment. An alternative view is that I still have all my savings but have lost 61% of my gains. That’s about all the gains (net of draw-down) since 2011. It’s too much to comprehend. I’m determined not to sell – and thereby not to realise this paper loss!
This has compelled me to take stock of my liquid cash position and my expected expenditure. I raised cash levels ahead of the election which has helped to ensure that I have about seven months spending in available cash. If needed I can reduce spending to make this cash last for ten months. I had been re-investing all my dividends and selling down shares not in my ISA every three months to fund my expenditure. I have now set these non-ISA held shares to pay out their dividends, which will give me enough cash over the next year to cover three months spending. I reckon I can therefore avoid selling any shares or taking any dividends from my ISA for over twelve months.
One concern is what will happen to dividends in the next few months. I think the 61% of my portfolio I have in equity income investment trusts that are actual or aspiring dividend heroes will maintain and very slightly increase their dividends overall. They have dividend reserves they can use in order to sustain their dividends when the dividends they receive are reduced. If the current crisis is prolonged and dividend reserves are depleted then that may change after one or two years. I am more concerned about the 15% of my portfolio that I have in corporate bond and commercial property investment trusts. These are more likely to reduce their dividends substantially. I am considering whether to recognise that and take a dividend hit on them now by switching from them to lower yielding equity trusts.
In a way I’m not too worried by this fall in net worth because I have experienced similar falls in 1987, 2001-2002, and 2008, and seen things recover. This current crisis is, however, different to those and is unprecedented in recent history. The other aspects of this crisis do, however, give me more things to worry about than my net worth, and tend to put that aspect in perspective. I am concerned for the health and the life of myself and my family, and our friends and acquaintances. I am concerned about doing the right things in terms of social distancing, shopping but not hoarding, and helping people where we can. I am concerned about supporting our children’s education and well-being now that their school has mostly closed and lessons have moved online. I am concerned about the consequences for the UK economy and government. I think these concerns are going to weigh more heavily on me than my financial position in the next few weeks and months – so long as I have sufficient cash to cover our now reduced spending.