My 2016 portfolio goals

In my professional life I am a big believer in goals.  In business, knowing the key metrics to focus on, and focusing on them, is a key skill.   From an investing standpoint however I am unconvinced; investing is inherently about managing risk and almost by definition that means being prepared for matters outside one’s control. Nonetheless, in 2016 I have some very clear goals for my portfolio so it makes sense to write them down.

Contortionist_Ravi_standingWhat’s different about 2016 is that as the year begins I am a few weeks away from completing on a house purchase.  This wasn’t foreseen even a month ago.  The Dream Home is being purchased out of my investment portfolio, so I am going through some financial contortions to make this happen.  My main objective for the year is to finish the year back on my feet in roughly my usual posture.

To attain my usual posture I have three goals:

  1. Continually reduce my margin loan’s Loan-To-Value (LTV) ratio, eventually to 15% of my liquid sellable assets. To buy the Dream Home I am borrowing a significant sum against my investment portfolio.  This loan is known as a margin loan, and will amount to about 38% of my sellable portfolio at completion (in my simplified balance sheet, the £875k loan is just over 40% of the £2.025m sellable assets).  My intention is to sell my previous home later this year and use the proceeds to pay off its mortgage (which is a shame but I have no choice) and to reduce the margin loan.  While the proceeds should be enough to eliminate the margin loan entirely, I don’t intend to fully repay it – as a margin loan feels like cheap money.  But my plan is to pay off enough to get the LTV down to 15% – which feels ‘safe’.  Until that home is sold, I want the margin loan’s LTV to decline – either because Mr Market increases my portfolio’s value, or because I use income/other assets to pay down the loan.  I will measure this on a three month rolling basis.
  2. Maintain investment income of £Xk.  Modesty precludes me revealing X.  But X is significantly lower than I have been used to, due to me liquidating a significant portion of my portfolio to pay for the Dream Home.  X is in fact slightly less than I need to fund my taxes, my unchanged lifestyle and my new margin loan interest costs; meaning I will not be Financially Independent on income of £Xk.  However when combined with my (low) earned income, £Xk should be enough for me to be cashflow positive this year – albeit with only modest savings (ignoring any repayments to my margin loan). A related measure here is the earnings:interest ratio (i.e. X:margin loan interest), which needs to be at least 3:1 to make the margin loan worthwhile after taxes. If base rates rise and yields don’t then I will need to look at lowering the LTV to get the earnings:interest ratio back above 3.
  3. Closely track my target asset allocation.  My much-reduced investment portfolio will be significantly out of shape at the point I complete on the property. But, despite the contortions I’m enduring, my Investment Philosophy remains unchanged – though I do anticipate making, Blofeld-like, the subtlest of adjustments to my target allocation to reflect my reduced risk appetite while I carry two London homes on my balance sheet. Once I’ve settled on my target allocation, my goal is then to ensure none of my exposures are more than 10% adrift from their target – so if the target is 15% then the allowed drift is 1.5% of my portfolio. This goal is to be measured quarterly.

These goals are all reasonably SMART (Specific, Measurable, Achievable, Results-focused and Time-specific); I may well explain more about how I plan to hit them in further blog posts.

Other goals I have considered but rejected:

  • A spending goal.  I could widen my goals beyond just my portfolio.  But I don’t want to.  For one thing, the Dream Home is going to require a fair bit of non-recurring spending.  But what I will do is monitor my spending for the year, so that as I assess whether I’ve hit my goals I can consider what they need to be in the light of some accurate spending data.
  • A portfolio expenses goal.  I do firmly believe that minimising portfolio expenses is a Good Thing.  But it isn’t going to make much difference to 2016 for me. And my wider preference for fewer goals wins out.
  • A net saving goal.  Perhaps in place of the margin loan reduction goal.  I’m choosing the margin loan goal because margin loans make me nervous; they clearly involve risk and expense.  While I can rationalise how I will cope with the risk and expense, the sooner I can get this loan into a de minimis level the happier I am.  And I don’t really mind whether I do that by selling down assets, or using net savings to pay off the loan.

How do these goals seem to you?  Am I missing any?




5 thoughts on “My 2016 portfolio goals”

  1. Hi. I’ve thoroughly enjoyed following your account of the house purchase – a real situation and real numbers.

    In your position I would whole-heatedly agree with #1 (though I would be targeting a complete reduction). I’m less convinced by #2 and #3 (but accept that these reflect your active approach, whereas I’m much more passively orientated). I would have a spending goal though, but would exclude first-year new house costs. I’m sure you could roughly calculate your current spending, without needing to wait another year to have more accurate data. Until I was debt free, I’d be more inclined to go without.

    My financial goals remain the same. To save/invest enough to meet what I calculate to be the costs of private education and financial independence. As my investments are regular (in frequency and value), I know which month/year I will have reached both goals (assuming certain market performance). Thus, I’m just tracking that my investments are made and that the timeline is still valid. I review the trading costs twice a year.

    Happy New Year!

    Liked by 1 person

  2. FVL

    Thanks for sharing your 2016. I don’t think that selling a house to pay out your mortgage will be good idea (in my point of view), better to rent the house and with that to pay the mortgage.

    Happy new year

    Sharon – Divorcedff


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