I promised a quick update on how 2011’s demo high yield portfolio (HYP) was doing from an income perspective – having already cunningly posted the exciting capital value update on the slow news day of June 23rd.

Ahem.

Okay, so June 23rd – aka EU Referendum Day – turned out to not be so dull, after all. And we all got distracted for a few weeks.

But now I’m back to share the income picture, and to muse a bit about what it all means.

Loadsamoney

An ultra-quick recap: You’ll remember I invested £5,000 of my own real money into this demo HYP back in 2011, and that I’m benchmarking it against two alternatives – a FTSE 100 tracker and a trio of investment trusts.

Please refer back to my most recent capital update for more on the whys and wherefores, including links to a mini-FAQ all about HYPs, this demo, and the benchmarks.

Today, as I’m already ludicrously tardy with it, I just want to cut to the chase and get those income details up!

So here’s a snapshot of how the demo HYP and its benchmarks are doing, both in capital terms (updated since 23rd June, because why not?) and in terms of how they’re kicking out income.

I’ve also calculated yields for the portfolios.

	Current value	Income	Yield	Yield on purchase
Demo HYP	£5,896	£231	3.9%	4.6%
FTSE 100 ETF	£5,549	£235	4.2%	4.7%
Trio of trusts	£6,318	£265	4.2%	5.3%

Note: ETF/Trust prices from Yahoo, dividends from iShares and the A.I.C..

A few things to note:

• The 12-month period being studied is from 11 May 2015 to 12 May 2016.1

• All income rounded to nearest pound.

• For the demo HYP, I’ve simply totted up all the real-money dividends received.

• For the FTSE 100 ETF and the trio of investment trusts, I’ve sourced and totaled dividend data from relevant information providers, and then multiplied it by the number of shares in the notional benchmark portfolios.

• Capital values are up-to-date as of 28 July 2016. (Remember, these are NOT reinvesting portfolios – all income is presumed to be withdrawn each year).

• Yield is the income over the 12-month period expressed as a percentage of the current capital value.

• Yield on purchase tells us what we’re getting as a percentage of the initial £5,000 investments.

Here’s how the income has grown for each vehicle in the four years since my one-year update.

	Income: 2011-12	Income: 2015-16	Growth
Demo HYP	£182	£231	27%
FTSE 100 ETF	£155	£235	52%
Trio of trusts	£184	£265	44%

Thoughts (or bonfire of the vanities)

The first thing to say is that all three portfolios have been doing the business, growing the income they pay out compared to the first full year of coverage.

That’s not surprising – we’ve seen several years of generally rising dividends – but it’s still heartening.

If you had invested in any of these options for investment income – whether for financial freedom or to help fund your retirement – I think you’d be pretty happy so far.

Of course, if you’d invested in the demo HYP and your next door neighbor had invested in the trio of investment trusts, then you might be somewhat less happy as you chat over the garden fence about shares, as we all do on those balmy summer evenings…

I’m a long time fan of UK equity income trusts. But I must admit that even I’m knocked back on my heels by just how well they’re doing here.

Both in capital terms and in the income they’re chucking out, our notional trio of trusts are soundly beating the two alternatives.

Now, like everything to do with this little side project we shouldn’t start claiming to be learning anything incredibly definitive here.

For one thing, five years is a short time.

For another, the trio of trusts is influenced by luck and any sliver of skill I brought to their selection.

There are dozens of trusts out there, and picking three different ones would have given you a different result.

For instance, the worst performing component of my basket of three trusts, Merchants Trust, is pretty much flat both in capital and income terms over the past five years, whereas the best, Edinburgh, is up over 50% in capital terms.

But it’s in the selection of 20 shares for the demo HYP that idiosyncratic risk looms largest.

And here I’m desperate to cry about bad luck – rather than blame my blundering incompetence – for the fact that no fewer than a fifth of the portfolio cut or even cancelled their dividends entirely at some point over the period.

BHP Billiton, Balfour Beatty, Centrica, and Tesco: Your names are mud to me now!

A fifth of the portfolio cutting their dividends is a terrible hit rate. You’d expect it to hurt the total income and it has, as the demo HYP doesn’t have any cash reserves to smooth payments like the income trusts do. (Cash buffers I’d suggest you implement for yourself if planning to live off investment income).

In fact, the dividend cuts mean the demo HYP last year paid out only £2 more than at the second anniversary point.

So what do I plan to do about it?

Nothing. This is a no-trading portfolio, remember, as explained in the links below.

Hopefully the income from the dividend dunces will be rebuilt. (Although I don’t doubt something else in the portfolio will be hacking and slashing at their payouts over time, too.)

Finally – and curiously – despite lagging in capital growth terms, the iShares FTSE 100 ETF has delivered the strongest income growth. Its annual payout now matches the demo HYP.

This is a surprising result, and perhaps indicative of the times we live in.

But with earnings no longer covering dividends at the 350 largest UK companies2, it will be interesting to see how it and the other vehicles fare over the next few years.

Whatever the academic theory says, it’s hard for me not to imagine the trusts will continue to have the edge in an environment of further dividend cuts.

Demo HYP: Frequently Asked Questions

Here’s that pseudo-FAQ (it’s really a bunch of links to previous demo HYP articles) for those too engrossed to click away earlier, or who I’ve now confused into having more questions:

• Where can I find the five year capital update?

• Why did you set up a demo HYP, and how did you choose the shares?

• When and how did you buy the demo HYP?

• What do you do with the dividend income? Why don’t you reinvest it?

• How do you benchmark the demo HYP?

• What’s the trading strategy? (There’s no trading!)

• How did the portfolio do in its first year?

• How was it doing after two years?

Right – that’s enough HYP updates for this year!

1. The demo HYP was set up in May 2011. [↩]
2. That is, so-called ‘dividend cover’ has fallen below one. [↩]

I am sure we’ve all (at least around these rarefied parts) at some time asked ourselves: “Am I saving enough for retirement?”

For years, it’s been a boringly predictable question that has been used to frighten people into upping the amount that they put into their pensions.

Towards the end of every tax year, for instance, the usual scare-story projections are trotted out by lazy journalists looking to file a feature on SIPPs or Additional Voluntary Contributions.

IFAs – those fine, upstanding members of the community – are also keen advocates of the ‘are you saving enough for retirement’ question.

(You’re not? Well, they have just the product for you.)

Most Monevator readers, I’d guess, will have long since learned to switch off when they see the words. Broadly speaking, we will have decided years ago what level of saving was appropriate for our circumstances, and proceeded accordingly.

The savings vehicle of choice might have differed – one man’s SIPP is another woman’s ISA, and all that – but there would be no denying the commitment to serious saving and investing.

Miserly returns

Up until recently, I’d have put myself very firmly in that camp, too.

Now, I’m not so sure.

Take a look at the UK’s latest historic equity returns, as published in the prestigious Barclays Equity Gilt Study 2016, released in March.

Continuously published since 1956, the Barclays study tracks the real (after inflation) returns on cash, equities, and bonds, all the way back to 1899.

Here are the real returns (% per annum) for UK equities, gilts, and cash:

	2015	10 years	20 years	50 years	116 years
Equities (shares)	-0.1	2.3	3.7	5.6	5.0
Government bonds (gilts)	-0.6	3.0	4.3	2.9	1.3
Cash	-0.7	-1.1	0.9	1.4	0.8

Source: Barclays Capital Equity Gilt Study 2016.

No surprises there, perhaps. 2015 was a dud, and real returns from equities over the past ten years were just 2.3% a year. Only over the past 20 and 50 years do we see serious returns being achieved.

The only consolation is that cash and bonds didn’t do much better, either, although gilts have fractionally outperformed equities over ten and 20 years.

So much for the risk premium, Mr Ross Goobey1.

Rear view vision

Now let’s turn the clock back ten years, and look at the 2006 edition of the Barclays Equity Gilt Study.

UK equity real returns (% per annum) as per a decade ago:

	2005	10 years	20 years	50 years	106 years
Equities	18.9	5.0	7.4	6.6	5.2

Source: Barclays Capital Equity Gilt Study 2005.

You don’t need to have made a recent visit to Specsavers to see the difference.

Ten years ago, the expectations of equity returns, based on past returns, were very different from those of today – and much, much, higher.

And that, what’s more, was in 2006 – in other words, a time when the UK’s stock markets were well into the post-dotcom ‘lost decade’.

Take the equity returns you’d have been looking at in 2005 as having been accrued over the previous 20 years, for instance: 7.4% a year. Incredibly, that’s twice the return of 3.7% seen in our latest figures.

The past ten years? 5.0% a year in 2005 – just over twice the return seen in the latest figures.

Flawed assumption?

All of which matters – at least to many Monevator readers – because the mid-2000s was when many of us were formulating our retirement plans.

Looking back at my own spreadsheets, for instance, I see that I was pumping £530 a month into various retirement-related investment vehicles, by way of regular monthly savings.

That’s net of any tax relief, and also excludes any end-of-year lump sum investments made for tax purposes.

Small beer to some, perhaps. But, totaling it all up, I was probably putting aside £9,000-£10,000 a year.

Again, small beer to some. But significant enough at the time, and especially so given my own circumstances, with one child still in primary school, and one just started in secondary school.

Save more! Save more!

The point is this: doing those same sort of calculations today, and looking at today’s expected investing returns, those Barclays Equity Gilt Study figures suggest that I would need to be putting aside considerably more.

And I’m not at all sure that would be possible, for someone at a similar stage of life, and with similar financial circumstances.

Heck, even though I’m in the fortunate position of being able to invest considerably more these days, it’s still a pinch at times – even though one child has left home, and the other is at university.

What to make of it all?

For me, the bottom line is that even though I was aware – on an intellectual level – that returns over the past few years had been lower, I was unprepared for how much lower they appear to have been.

Or that even though 2015 saw the FTSE 100 finally surpass its dotcom peak – some 15 years afterwards – the intervening years were so dismal as to still halve the long-term returns compared to 2006.

Am I saving enough for retirement? Possibly so. Just.

But I bet many others aren’t, even though they thought that they were.

Note: You might want read all Greybeard’s previous posts about deaccumulation and retirement.

1. George Ross Goobey was the fund manager who in the late 1940s and 1950s famously persuaded pension funds to invest in equities, not just gilts. [↩]

Good reads from around the Web.

A big congratulations to fellow UK personal finance blogger and sometime Monevator contributor, Retirement Investing Today.

After years of saving hard and investing wisely, RIT – as he is known to his friends and to those with carpal tunnel syndrome – has achieved his goal of financial independence.

The recent stock market rally has pushed his portfolio to the £1,014,000. According to his sums, that makes work optional for the foreseeable future.

Somewhat ironically though, the weak pound that has helped lift his assets has arrived in concert with a host of other post-Brexit imponderables that have made that “foreseeable future” rather less foreseeable.

RIT writes:

You’d think we’d be out celebrating. But in the RIT household this week (and in the run up in recent weeks) there has been calm as I’ve actually been umming and ahing about whether I can actually call myself Financial Independent.

The main reason for this is that over the years I’ve diligently planned for just about every financial situation that I can think of.

However what in hindsight I’ve actually glossed over is the risk of politicians just blatantly changing the rules.

In the past few weeks we’ve seen some of this appear via the Brexit vote, which for somebody who intends to emigrate to an EU country as soon as they FIRE has brought real risk.

One impact is that in UK pound terms, the European-based property that RIT plans to sip fancy foreign beverages in until senility comes knocking is now more expensive.

The pounds thrown off by his investment portfolio won’t stretch as far when buying that booze on the continent, either. Nor his bread, his olives, nor his live-in maid and butler.

(Okay, they’re not in his plan. But if they were…)

RIT is also having to think again about his pension and healthcare entitlements in life after Brexit.

It’s yet another reminder that everything can turn on a dime, which for me makes micro-debates about whether 2.73% or 2.74% is a safe withdrawal rate in retirement rather moot.

Still, it’s great to have such options.

Tribal uncertainties

Brexit will sort itself out in time. Being free at 43-years old, RIT has plenty of that on his side.

And that’s the really inspiring part of his journey, for the likes of you and me.

If he can do it, can we?

Like me, RIT began blogging many years ago when there were barely any UK personal finance blogs around. If I recall correctly he started blind, before discovering how others had blazed a trail to financial independence before him.

When I began Monevator in 2007 I’d read some nascent US blogs – and a few influential financial forum posters – but my own journey to financial freedom was otherwise motivated by a personal epiphany.

You probably always need such a ‘lightbulb moment’ to get started.

But once you have begun, there are nowadays all sorts of sites to help and inspire you. I feature many in the links here every week.

Indeed, the Internet is abundant with role models.

• Will you do what a 25-year old friend of mine does, and follow a slew of fashion fanatics on Instagram, spend all your money (literally) on shoes and handbags, and then beg others for a pint so you can cry over your penurious plight?

• Will you work your fingers off and save nearly everything that’s left after food and rent or mortgage payments, in the style of RIT and my co-blogger The Accumulator? (Their patron saint and blogger Jacob also described his methods on Monevator).

• Will you be a bit slacker like yours truly – saving more than almost anyone you know, but still splashing out strategically on nice clothes, the odd overseas holiday, and making more effort to grow your income than to cut back on every last frothy coffee?

• Or will you (and the correct answer is “yes, this one!”) roll-your-own plan?

Your choice – but choose carefully.

US financial advisor Tony Isola wrote this week about the downsides of similar minds flocking together on the Internet, before asking:

[What] if we are genetically predisposed to join a tribe?

The answer is: find the right one!

I know I have.

Your tribe, like mine, should consist of people of high character.

Data and evidence should take precedence over emotion. The focus should be on what the tribe can control. Things beyond the tribe’s influence are rightly ignored.

Investment friction, like taxes and high-fee products, along with global diversification, are prime examples of the former; short-term market returns, the latter.

Finally, your tribe should think in probabilities and not certainties, which are non-existent in the markets.

Unfortunately most investors end up in tribes that spend their time throwing coconuts at each other, like our ancestral primates. They worship false investment gods and create cults of personality.

Deal with it; tribes are a major influence upon the choices we make. Joining the right one to manage your investments is a decision you should not take lightly.

With his blog – and the completion of his first goal – RIT has surely inspired many people climbing towards financial independence.

Not a bad tribe to belong to.

Still crazy after all of these years

RIT tends to update his blog on Saturdays – and often after I’ve done my Weekend Reading links.

This means he actually achieved financial independence a week ago. By now he might have spent it all on fast cars and even faster women!

It’s okay, stand down – I just checked and everything’s good. Rather than withdrawing his cash to head to a casino, RIT is predictably blogging about safe withdrawal rates.

Old habits die hard.

[continue reading…]