Taking stock – and sitting tight

Source: Pixabay

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.

8 Replies to “Taking stock – and sitting tight”

  1. Tricky times!
    However, as you say, first things first.
    In due course, I am sure we can all learn a few lessons.

  2. Thanks for your detailed update. I have enjoyed reading your updates although I haven’t always agreed with your analysis thinking its largely too income / UK centric. I am in the accumulation phase and so recognise in the de-accumulation phase it must be much harder – I don’t envy your (or others) position and it has been instructive for me psychologically. I do think the SWR is <4% on the basis of where annuity rates and gilt yields are – indeed I think it is probably closer to 2% and that's on a probability basis not a guaranteed basis. History isn't particularly relevant to calculating SWR because gilt yields are so low as the finumus blog articulated. The fall in valuations have been significant but the S&P 500 is still only back to where it was in 2017 (or 2018 at the mini bear market low point). So I am mentally prepared for equities to fall 50% from here. Not that I have any particular insights. The FTSE 250 looks a lot cheaper though albeit country specific risk is high in the UK. I think first strategy for retirees is to have a 2 – 3 year reserve. Then I would base future spending on a significantly lower SWR and top up my reserve back to 2 – 3 years as markets recover through dividends. I think you are around 60 (assuming you have a partner) and so you have a circa 1-10 chance of one of you making 100 assuming no underlying illness (albeit COVID-19 mortality rates have probably reduced that chance a bit for now – sorry to be unemotional about it). With a circa 40 year time frame (if 10% is an acceptable failure rate) – I do think 'SWR' is now closer to 2% than 4% as rates trend negative. That's just my view. Obviously that has profound implications for retirees globally and the cost of the government state pension.

  3. Thanks for your thoughtful comment. I agree with you on the need for a cash reserve in the current situation. I have less than one year and would now rather have more than two years. I think we have different views on de-accumulation approaches. I still prefer to rely on the natural income of my investments, but I think that my income will now fall. Using a 2% SWR will have profound implications for those in the accumulation phase.

    • Yes, I agree 2% would seem to have the same implications for those saving retirement as those in retirement. Although at least those in accumulation have more levers to pull (work longer, save more etc etc). Maybe 2% is a little cautious but I’m not sure about that given where bond yields are.

      In terms of your portfolio, it seems as if the capital value has fallen by more than the market. This could be because its orientation is one that is higher yield and therefore more sensitive to volatility. The problem with higher yield is much of the return comes in the form of the income and of course if ignores many companies.

      In terms of changes – I would

      – Consider a greater allocation to govt bonds both £ and $. Either in terms of years savings (min 2) or % to reduce volatility.
      – Reorientate the portfolio away from yield towards total return. Doesn’t mean you need to be entirely away from investment trusts at all. Just make sure you aren’t picking investments solely because of the yield – Personally think some uk income trusts / high yield bonds are a bit of a problem – great for a decade and then an event happens and the capital is particularly impacted – particularly when yields are so compressed through low interest rates
      – Reduce yourself from the 4% SWR. The 4% SWR was based on history (much higher I/R), US equities and of course included all costs. It also had significantly volatility – greater swings than we have seen including the great depression. So it’s a useful reference point but many reasons why it is no more than that. Appreciate that means spending needs to fall
      – Be prepared for significant equity falls from here. Not that I think they will happen, I have no idea, they just might. I do feel given the 0% I/R (negative real), money printing and other govt support, equities will go back up sooner rather than later. It might well be the case the FTSE 100 gets back to its previous level at 1/2 the yield as companies seek to hoard cash (might easily be wrong)
      – One positive is presumably you can withdraw a state pension soon, which is very hand annuity like investment and can be used to sustain a higher SWR or rebuild your funds

      I remain rationally pessimistic. Not because I know what will happen, I haven’t any idea, just that if the outcome is better than that then it’s upside. Disclaimer, I’ve made some pretty shocking investments in my time.

      Just my opinion clearly…best of luck

  4. Thanks again. The capital fall is made worse I think by investment trust discounts widening, i.e. the share prices falling by more than the net asset values. I will probably continue to sit tight as share price volatility continues, and will re-visit and review my strategy in due course. For now I may reduce my exposure to corporate bonds and commercial property.

    • Reducing commercial property makes sense

      RE Convertible bond – have a look at the underlying – is it because they are high yield so the credit is suspect or is it because correlations have trended to one and so everything being dumped. If the latter then you should find the corporate bonds will bounce back.

      Sitting tight makes a lot of sense, very much really as I’m suggesting. You of course just need head-room to enable you to do so.

      Interesting on Investment Trusts – maybe this is where the real opportunities are if there is another leg down

  5. The low point so far was 19 March, as shown in this blog post, but there could be some lower points ahead. Those could be an opportunity for investors with cash available to invest.

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