Wahoop! I have made it through ten years.
In fact, I’ve had a trackable portfolio for over 20 years. But 10 years ago I started tracking my portfolio in a consistent, monthly way – unitising its performance so I could measure its return. It wasn’t until 2015 that I started this blog, but since then I have been reporting monthly on the progress / setbacks I’ve made/encountered.
I have taken a Bogleheads performance tracking spreadsheet as the template for my own portfolio returns tracker, and that template has had a ’10 year’ row staring at me with a #N/A for the last 10 years. No longer!
In any case, I will loosely follow the format I’ve used for the last couple of years. I’m looking at seven generic questions that I think all prudent investors should ask themselves at least annually.
Q1 How did ‘my’ markets do?
The first question is ‘what happened out there?’.
Firstly, how was December?
December 2022 was less than 1% of the 10 year time period I want to talk about, but here are the figures, in the markets that I’m in. It was a fairly sh*t month – one of several in 2022.
And secondly, how was 2022?
This left the year as a whole looking as follows:
2022 was, in a word, sh*t. Unless you were shorting the GBP, in which case you may well have done alright. And before those UK cheerleaders pipe up talking about how the FTSE was the world’s best performing major stockmarket, I will point them to the currency. FTSE-100 is mostly international companies, so when the pound falls by 5%+, you should expect their revenues to gain by 5%+. Which, as it happens, is almost exactly what happened to FTSE.
It is worth looking at bonds for a moment. They had a bad year everywhere, as interest rates started rising significantly faster than expectations. But UK bonds won the bad year award.
It has become fashionable to decry the death of the 60:40 equity:bond portfolio. I think it is far too early to do that. I remain a believer in Modern Portfolio Theory, which advocates combining equities and bonds to create a portfolio with a better risk/return balance than a pure equities (or bonds) portfolio.
The pound fell, as mentioned. But the real story was the rise of the USD. There were several reasons for this – but the USA’s distance from Europe, emergence from Covid, generally good government and robust economy all played a part. In the UK we had almost the mirror image of that.
Next, how were the last 10 years?
When we look back over 10 years, in fact, the picture changes significantly. My table below is an approximate hand-rolled look at the asset classes as I categorise them, over 10 years. I see four clear patterns:
- Equities were great. Particularly USA equities – twice as great as anything else.
- Bonds were lousy. Worse than cash. Up 7% over 10 years – you’d have done better having cash in a savings account, everywhere except the UK. However, if you’d stayed in until 2021 you’d be much happier with your bonds – as you’d have escaped the 25-30% drubbing 2021/22 gave you.
- The pound hasn’t done too badly. It is down 5% against the Euro, which considering Brexit was a mid-decade surprise was much better than I’d thought. The USD is up 30%, but the AUD (which I generally think is an OK currency) is in fact down almost 20%. In truth, the AUD was very strong 10 years ago, and has reverted to the mean. The USD and GBP have continued their long term trends.
This 10 year summary shows a very different view from the annual patchwork quilt. The patchwork quilt tends to be wheeled out to support arguments for diversification. You can’t tell which markets are going to do well/badly, so don’t try – you need to own a bit of everything. UK equities have been top of the ranking twice, and bottom twice. And so on.
But actually the 10 year view says there was a different approach – the Warren Buffet approach – which was just to focus on USA equities. If you had done that, and held on, you’d have more than tripled your money (in USD). You’d have had a fairly wild ride, particularly in early 2020, but if you’d entered in early 2013 when S&P500 was at 1450, you’d be at 3900 today – and you’d have had a further 25%-ish return from dividends.
Q2 How did I perform vs ‘my’ markets?
Needless to say, I did not have a 100% S&P portfolio over the last 10 years. I was however measuring my portfolio in GBP, which gives me a 30% boost versus USD.
My headline number was 8.0% compound. This came with a maximum drawdown of 23% – the most I lost over 10 years. I’ll look at Sharpe too, a bit further on. But what really matters is how this compares to ‘my’ markets – those markets I am exposed too, via my asset allocation.
My target allocation has shifted from time to time. It started off with a substantial home bias, but around 2017 I reduced my UK weighting and then in 2019 I upped my International weighting. Since then, the equity weighting has a slight UK bias but is much closer to the global equity weighting.
Summarising the last 10 years it was generally around 80:20 equities:fixed income. The performance of a simple version of such a portfolio is shown in the graph below, in grey, alongside my actual performance and alongside VUKE (the FTSE-100). I closely tracked the 80:20 portfolio – a small lag unsurprising considering my UK home bias until 2022. Then in 2022 I upped my leverage to ~30%, and then the markets fell…… ouch.
As well as my shift away from UK investments, I have also developed a tech tilt. Tech stocks often have quite a high beta (e.g. Amazon: 1.17). Combining this with the high leverage I took on in 2022 has left my portfolio catching a cold when others sneezed.
I didn’t always have a tech tilt to the portfolio. The table below shows my top 10 holdings at five year intervals. This is quite a blast from the past; iShares’ UK Dividend ETF IUKD used to be a major holding but I don’t touch it these days. The tilt to tech is clear – much of this was from existing positions growing in value, rather than me topping up.
|Jan 2013||Jan 2018||Jan 2023|
|#1||VUKE (7.8%)||IUSA (5.4%)||VTI (6.2%)|
|#2||ISF (6.7%)||AMZN (4.6%)||GOOG (5.4%)|
|#3||IUKD (5.0%)||GOOG (3.9%)||AMZN (4.7%)|
|#4||Cash – GBP (4.3%)||VBR (3.9%)||VFEM (4.2%)|
High Yield (2.5%)
|VWRL (3.6%)||IUSA (4.1%)|
Div Growth (2.4%)
|VUKE (3.0%)||VBR (3.7%)|
|#7||VBR (2.1%)||IGLT (2.7%)||BND (3.6%)|
|#8||IDVY (2.1%)||JPM (2.6%)||MSFT (3.2%)|
|#9||MIDD (2.0%)||VTI (2.5%)||IGLT (2.9%)|
|PFF (2.3%)||AGG (2.9%)|
|% of total||37%||34%||41%|
One view of a portfolio’s performance that I find helpful is to look at its Sharpe ratio. This ratio expresses how much return you get for a given amount of risk. Higher Sharpe ratios are better. In theory, a blend of two somewhat uncorrelated asset classes (e.g. equities and bonds) will have a better risk/return combination than either asset class individually – this should show up as a higher Sharpe ratio.
As it turns out, the VWRL Sharpe ratio over the last 10 years was 0.8. This is pretty high. But the 80:20 portfolio’s, as expected, is even higher – at 1.0. Unfortunately my own portfolio’s Sharpe is only 0.7 – worse even than the 100% global equity index. I can take some comfort from being ahead of FTSE-100, but crumbs of comfort.
|80% VWRL:20% IGLT rebalanced monthly||1.0|
|Actual FvL portfolio||0.7|
All in all, my performance over the last 10 years has been ‘meh’. I haven’t materially beaten the market, at any point (apart, perhaps from the first few years). And I have lagged it significantly in the final year – with my high leverage proving to be terribly timed.
Q3 How am I doing versus my retirement goals?
I’ve said before that I don’t really have straightforward retirement goals.
However I think the crudest retirement objective is having sufficient investment income. And right now my investment income is more or less at the amount I ‘need’ to maintain my (very nice, thank you very much) lifestyle. Investment income rose by 6% in 2022, despite my portfolio falling in value by 20%. Behold, my 10 year ‘weenie graph‘:
I don’t accurately track my spending these days. Or rather, I track it, but the figures are so noisy I don’t have firm conclusions on what I ‘need’. It’s clearly a higher number than it was a couple of years ago though, now that I run two households and with double digit inflation having an impact.
In any case, I definitely don’t feel comfortable at the idea of giving up on paid work just now. My leverage is too high, which is absorbing quite a chunk of my monthly cashflow. I have very little buffer between current investment income and perceived monthly outgoings – so higher tax rates or unanticipated expenses would see me running a deficit. If markets fell 20% and income dropped with them I’d have to sell assets to maintain living expenses. And moreover I have no intention of spending my ISA income for many years yet, unless the unlimited tax break policy changes.
So, for now, One More Year Syndrome is a thing – and until I stop full-time work I’ll keep reinvesting my investment income. In other words I have two roughly equally sized income streams, one of which I live off and one of which I reinvest. With my investment income roughly equal to my earned income (and monthly spending), in effect my savings ratio is about 50%.
Looking back with a ten year view, I feel pretty positive about my portfolio. It has enabled me to make two Big Hairy Audacious moves, both property related, which have changed my life for the better. That has taken some planning and monitoring, but it has happened. The portfolio remains much larger than it started, excluding many millions of pounds worth of property. And if my long term retirement goals aren’t to be able to live life comfortably but also be able to take advantage of opportunities to upgrade when I see them then I have the wrong goals. On that test, my portfolio has performed well.
Q4 How tax efficient
is my portfolio are my finances?
The slow trend to my portfolio becoming more tax efficient continues.
I’m putting the maximum possible into my & Mrs FvL’s ISA every year. This provides a slow upward escalator moving the tax-free portion up every year.
I and Mrs FvL are continuing to top up our pensions. This is not tax efficient, in my case, but my spreadsheet doesn’t know that yet.
Usually I would expect to have enough other income/savings/windfalls to push me down the upward escalator. But that certainly wasn’t the case over 2022. And in 2021 I sold a good chunk of my taxable assets to buy the Coastal Folly.
My effective tax rate on my investment income, ignoring allowances, is about 28%.
As last year, my working earnings are fully taxed – at the additional tax rate of 45%. And as last year, my pension situation is not tax efficient. The problem hasn’t growth, because my pension has dropped in value so it remains, for now, slightly below the total lifetime allowance.
What I have woken up to, and what 2022’s poor performance has crystallised for me, is the need to dramatically accelerate contributions to Mrs FvL’s pension. Her pension is not on track to hit the lifetime limit before she is 65, unless markets do very well indeed, and I need to fix this. I’ve started, this month.
Q5 What does my portfolio cost, in cash terms?
The next question is the fee burden borne by my portfolio. 2022 saw a real backward step here. This was largely because of my increased leverage. I am paying the usual fees (on ETFs/funds/etc) on the borrowed portion of my portfolio, but expressing those fees as a % of the net assets. So with my leverage jumping up from 10% to 30%, my fees have jumped up about 20% too. As before, the bulk of the burden remains the private bank fees I pay. The total fees are just over 0.5% – so while material they are not that big a drag on the portfolio itself. I was paying considerably more, as a %, 5 years ago.
Q6 What does my portfolio cost, in time terms?
Since early 2020 I have been reducing the complexity of my portfolio.
I made slow progress overall in 2022, with my total number of unique holdings dropping from 120 to 113.
However, the UK Govt’s Moron Moment in September saw me take a step backwards. I became so unimpressed by INXG (iShares’ UK Index-linked Bond ETF), but also so tempted by the yields on government bonds, that I bought a few bonds directly. Not large holdings, and really just as a learning exercise. But this has increased my unwrapped holdings by a few, and increased the number of small (<£20k) holdings I have to 9. This feels irrational and I will fix it in 2023.
Q7 What key risks am I taking?
The last question on my list is about risks.
The year 2022 was a vivid lesson in the risks that come with leverage. I’ve been monitoring my leverage carefully, and redirecting taxable investment income into paying it down. But it’s been all I can do to maintain the overall Loan to Value ratio as my portfolio has dropped in value. I finished the year roughly where I started, thankfully.
What you don’t see on the LTV graph is the good progress I’ve made in shrinking the absolute size of the loan. The graph below shows the loans by size. My leverage started for real in early 2016, when I bought my Dream Home with it. I had the loan firmly back under control by late 2018. Then came the sharp jump in Dec 2021 when I bought my Coastal Folly, taking my loan to unprecedented levels. You can then see the steady progress over 2022 I made in gradually reducing the balances. I still have another four or five years to go on that trajectory though. Meanwhile my interest costs have doubled during 2022 – which absorbs considerably more cashflow than I like.
I continue to own plenty of other assets I could draw on, but many of them remain in tax sheltered accounts which I would only access in a last resort.
Lastly, some concrete progress – I have updated my Will, and set up a Power of Attorney. Well, I say set up – it is sitting in my inbox waiting for final review/execution. But good progress on something I’ve been poor at clearing from my list.
The ten year view is sobering.
On the one hand, my portfolio has enabled some big life decisions that have made me very happy. And I’ve achieved over 8% a year, on average, which doubles things in less than a decade. If I have good health, and maintain these rates, I am going to become extremely wealthy – inflation or no inflation (UPDATE: inflation, as measured by the CPI, averaged 2.7% during the 10 years analysed here. So my portfolio delivered real returns of around 5.3% per year, which doubles every 13 years).
On the other hand, I’ve put a lot of effort into managing my money and barely managed to track the market. There is a lesson here about continuing to simplify the portfolio – if I can’t beat the market, then I should focus on reducing time/complexity instead.
I need to sort out Mrs FvL’s pension, which is inefficiently small at the moment. The ten year views help on these sorts of question.
I also finish the decade carrying more debt/risk than feels sustainable in the long term. While I have just endured a torrid year and come out OK, and am generally making OK progress, this issue isn’t going to be fixed in the short term.
And then there’s the blog. For the last 7 or so years I have kept a running commentary at least monthly. At times this feels arduous – and unnecessary even. But it also gives me discipline, and helps me organise my thinking. I’ve also had some fantastic support and input – via my comments section mainly – from some far smarter / more knowledgeable people than I come across In Real Life. So while I’m not committing to keep it up for the next 10 years, for now at least I am going to continue.
And on that note, what do you, the readers, think and feel if you’ve made it this far? Am I missing any other conclusions? How carefully do you track/monitor your portfolio, your expenses, etc – more or less than me? Is there anything you would do differently if you were me?