Three years ago on 30 November 2019, things were different. In the UK we were amid a general election campaign. A choice between getting Brexit done and levelling up or embarking on the Corbyn experiment – or so we were told. We had not yet heard of Covid-19 or learned of its impact on lives, economies and investment portfolios. I sold some shares to raise cash levels just ahead of the election. As things turned out I didn’t need to do that for the election, but it was useful to have more cash during the Covid stock market meltdown. We have now endured the Covid pandemic, and the lockdown of the economy, followed by a cost-of-living crisis exacerbated by the Russian invasion of Ukraine. I thought this would be a useful juncture to review our financial position. How had all these events impacted on us in pounds, pence, and percentages?
Benchmarks
I have chosen to compare our results against the UK price inflation measures of CPI and RPI. These are running at annual rates of 10.66% and 14.00% at present and have risen by 16.77% and 23.13% in total over the three years. As a UK based investor, I continue to use the FTSE All share total return index and a unit trust (M&G Index Tracker Fund Sterling A Acc) that aims to track that index for comparison.
| RPI Inflation | CPI Inflation | FTSE AS TR | UK Tracker UT | |
|---|---|---|---|---|
| 30/11/2019 | 291.00 | 108.50 | 7,585.91 | 143.83 |
| 30/11/2022 | 358.30 | 126.70 | 8,512.84 | 158.50 |
| Change | 67.30 | 18.20 | 926.93 | 14.67 |
| Change % | 23.13 | 16.77 | 12.22 | 10.20 |
Review Summary
I have looked at the key measures of household expenditure, portfolio annual income, portfolio capital value, and my calculation of investment return.
| Expenditure | Income | Capital | Inv return | |
|---|---|---|---|---|
| 30/11/2019 | 4.13 | 5.59 | 117.42 | 100.00 |
| 30/11/2022 | 4.42 | 7.02 | 134.28 | 113.13 |
| Change | 0.29 | 1.43 | 16.85 | 13.13 |
| Change % | 6.95 | 25.64 | 14.35 | 13.13 |
Capital
Starting from an index value of 100.00 on 31 December 2013, my capital had increased to 117.42 by November 2019, and to 134.28 by November 2022. The contributors to this increase of 14.35% are shown in the graph above. Most of the growth results from inherited funds (11.88%). Investment income exceeded expenditure and capital losses combined and contributed the remainder.
Investment return
I used these items to calculate my investment return.
| Opening | 100.00 |
|---|---|
| Inherited | 11.88 |
| Capital growth | -4.25 |
| Investment Income | 17.46 |
| Expenditure | -10.72 |
| Closing | 114.37 |
Money added in (inherited funds received) exceeded money taken out (for expenditure). Investment returns comprised investment income and capital losses.
| Money in/(out) | 1.16 |
|---|---|
| Investment return | 13.20 |
| Inv return calculation | 13.13 |
The calculation I use is = (Closing -Money in/2)/ (Opening +Money in/2) x100-100. =(114.37-1.16/2)/(100+1.16/2)*100-100
I am pleased to see that my investment return of 13.13% exceeds my benchmark returns of 12.22 and 10.20. My investment return is likely to be below that of global markets and it may be that I should review my choice of benchmarks.
Investment changes
I stayed invested throughout the difficulties of the last three years. I sold shares to raise cash every few months. I sold and bought to use my annual ISA allowance. I switched holdings occasionally. Looking at the investment portfolio now and three years ago about 80% is now held in investments that were held three years ago. 20% is in new holdings. Some lower yielding UK equity income trusts were sold. Trusts in the property, UK equity income, UK small company, and Asia Pacific small company sectors were purchased. On average these purchases are higher yielding than those sold. This has boosted portfolio income.
Income
Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 of 3.37%, had increased to 5.59% by November 2019, and to 7.02% by November 2022. The 25.64% increase in portfolio income over the four years was the result of the addition of inherited funds, the reinvestment of dividends received, increases in dividends paid, and portfolio switches and sales. About half of the increase (+14.37%) can be seen as a result of the increase in the portfolio capital, mainly from inherited funds and is a non-repeatable one-off. The other half of the increase (+11.27%) can be seen as a result of the portfolio income yield percentage being higher. This higher income yield on the portfolio suggests to me that the capital value could increase if dividends are not cut. I am pleased to see that this income growth of 25.64 has exceeded the inflation benchmarks of 23.13 and 16.77. Going forward I think my income growth will likely fall behind inflation if high inflation is prolonged. I am not too keen to chase any more yield from my portfolio.
Expenditure
Annual expenditure as a percentage of the opening portfolio value on 31 December 2013 of 3.24%, had increased to 4.13% by November 2019, and to 4.42% by November 2022. The 6.95% increase in expenditure is well below the inflation benchmarks. The recent higher inflation has impacted mainly on our grocery spending but only over the last three or four months. I expect the higher energy costs to begin to hit only in January 2023. Some other price increases have been balanced by reducing spending. We can choose to accept some price increases (Apple Music) but can choose to cancel some purchases when the price is increased (Investors Chronicle). Most of our spending is luxury or discretionary so we have some choices here.
Conclusion
I was pleased to see that investment returns were at least ahead of the UK index on this three-year view. Income growth that was not a one-off exceeded our expenditure increase although it fell short of the inflation indices. It is useful to conduct this review, so we know where we are financially. Overall things are OK for us.