Annual FI audit

It’s that time of the year when we take stock. Here at FIREvLondon, that means it’s time to do an ‘audit’ of our Finances, and our financial Independence.

Let’s take a look at some of the key questions an audit should consider.

Q1: What state is the balance sheet in?

I review the portfolio performance monthly, and it’s progress against ‘budget’ (i.e. target allocation). As this post highlights, December saw a very strong performance with net assets up almost 23%. An exceptionally strong performance, by historical or future standards, reflecting the 30% gain in the US stockmarket in 2019.

Liabilities remain very much under control too. The margin loan that provides my account with leverage amounts to just over 10% of the value of the assets.

Off balance sheet, the recent move to sell a key residential property and reinvest the money will provide further strengthening of the balance sheet.

Q2: How does the income statement look?

A year ago I borrowed a framework by {indeedably} in which he breaks down his assets and income. He has an unusual way of looking at his state of financial dependence, as shown by his (updated) image below:

Using this framework, 2019 saw me, like 2018, make a clear ‘profit’, or surplus, between total inflows and total outflows. However, from a Financial Independence perspective, i.e. stripping out earned income (and taxes on them), I saw a slight deficit – with outflows exceeding inflows. The chief reason for this was a very high level of expenditure on ‘wants’.

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I’ve paid for my Dream Home – in less than 4 years

With all the Neil Woodford news at the moment, you could have missed the fact that world equity markets are up over 12% so far this year. In GBP, at least. This rising tide has taken me over an important high water mark – my portfolio has recovered to where it was at before I raided it to buy the Dream Home.

For those of you who missed the whole stressful saga, I bought my Dream Home, on a whim, in December 2015/January 2016. To make this more complicated, I ended up funding the purchase very significantly through a margin loan – basically a loan secured on my equity portfolio, rather than a loan secured on the property.

Buying the Dream Home needed me to sell almost half my investment portfolio. I was doing this in the middle of a minor market correction (global equities were 15% off their peak), which felt like a very painful time to sell. In the end, by borrowing over £2m I was able to keep £2m+ invested that I would otherwise have sold.

In those first few weeks after I completed I was pretty exposed. If the market had dropped 30% I would have been panicking. Fortunately, as hindsight shows, it turned out very differently; world equities are up almost 60% since then. Brexit has ‘helped’ here, because the sharp fall in the GBP after the June 2016 referendum meant my (mostly overseas) investments sharply gained versus my margin loan; this is not easy to see in the graph but it is there if you look closely.

With a combination of my investment returns, some liquidity windfalls, my net position (of the liquid investment portfolio, which ignores properties, illiquid holdings, etc) is up around 90% since my Dream Home purchase. I’ve paid down over half the margin loan, and my leverage now is at a very modest level that carries (I believe) very low risk. Thanks to this leverage, in fact my total gross holdings are now bigger than ever before. My net position isn’t quite at record levels, but it is well within the margin of error – and ahead of September 2015, a few weeks before the fateful Dream Home decision.

As an aside, the rental income I’ve received from the old house (which has become an investment asset, albeit not one that I include within my investment portfolio on this blog) has not been a big factor here, because in practice I’ve used those funds to both pay for the old house costs, as well as fund the significant running costs of the Dream Home.

I didn’t anticipate recovering my investment portfolio in under 4 years, without selling the old home. It feels good to know that my money can work so hard in such a short time. So, time to buy another one? Dream on!


Holding up the mirror to my own trading behaviour

Idling away an hour on the long weekend, I found myself examining whether my mental model of how I invest is actually honest.

In particular I have an investment philosophy of holding for the long term, of buying (not selling). Is that true? How often do I in fact sell things?

My philosophy is to minimise fees wherever possible. But it is also to reinvest dividends manually, not automatically, so that I can rebalance as I go – rather than ‘high buying high, and low reinvesting little’. Moreover, my minimum amount for a trade in Mrs FvL’s account is only £1000 – the amount of cash that must accumulate before we reinvest it. So my philosophy leads to me making plenty of transactions, for which Mrs FvL pays full price. Does this lead to high trading expenses?

To answer my own questions I did the following analysis:

  • I looked only at Mrs FvL’s portfolio history. I manage her portfolio using the same investment philosophy, but in a simpler/cleaner way, as my own. I track all of her transactions in one place, unlike my own funds. And though her asset allocation is slightly different (lower weight USA, more domestic bias), this shouldn’t materially affect a transaction analysis.
  • I looked at the last tax year – i.e. the 12 months to 5 April 2019. This was a year in which I moved significant funds into Mrs FvL’s accounts, so there was more money to invest than normal – more than just dividends.

Mrs FvL’s portfolio has around 80 unique holdings in it. This is fewer than the ~200 in my portfolio, but is nonetheless highly diversified. Half of the value is in passive ETFs/index funds. The largest holding (an Australian Equity ETF) is about 8% of the total value, the biggest single stock is about 3%, and the smallest holding is worth about £2k.

Here is what I found:

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