Good-bye Amlin, thanks for your contribution

Amlin was added to my High Yield Portfolio (HYP) back in August 2014.  At the time I purchased 963 shares at a price of £4.4986 paying £34 in stamp duty and trading fees for a total investment of £4,366.

When the mainstream media get excited about stock market rises and falls they always seem to conveniently omit mentioning those lovely things called dividends.  From purchase Amlin provided me with £485 of those, they were growing dividends year on year and I was a very happy camper.

Then on the 08 September 2015 Mitsui Sumitomo Insurance Company (MSI) swooped in and made a cash offer for the company.  The rest, as they say is history, with the end result being £6,452 in cash hitting my account on the 08 February 2016.  Totting that all together and Amlin for the short period held provided me with a total return of 59%.  So while I'm sad to see Amlin go I'm not too sad...

So with cash, including some new money, burning a hole in my pocket what to buy?  Market falls have resulted in the UK Equities portion of my portfolio being underweight but not yet enough for active rebalancing so I’ll just passively rebalance for now.  My strategy to build enough dividends to live off in FIRE is also still well in control so I don’t need to add to the HYP.

Click to enlarge, My Annual Dividends

I therefore purchased £8,000 worth of Vanguard’s FTSE250 ETF Tracker, VMID, to continue my plan of further UK Equity diversification.  My UK equity split now looks like:

An Interesting Week

Source: wikipedia

Rather than a particular focus this week my brain has been a little all over the place.  Maybe it’s the after effects of too much Christmas and New Year cheer...  What it means though is that instead of a detailed focused post today what you get is a smattering of random thoughts.  If that’s not your thing then you might want to move onto your next piece of Saturday reading.

Stock Market Fun

The big boys and girls seem to have come back from their Christmas vacations and (started to?) put the markets back in their place.  On the week:

• China’s Shanghai Composite Index is down 10.0%;
• The US’s S&P500 is down 6.0%;
• Japan’s Nikkei 225 is down 7.0%;
• Our FTSE100 is down 5.3%; and
• Our FTSE250 is down 4.0%

It’s only a week of market action but I thought it might be interesting to compare that action to a diversified portfolio that has different asset classes across multiple countries.  I hope I have one of those so comparing to my portfolio I’m down 2.3% on the week.  I’m not yet at FIRE but even now in pounds, shillings and pence that is a fall of £19,320 which is more than a year’s worth of post FIRE post home purchase living expenses.

London Housing

It’s all too rare that The Investor over at the excellent Monevator has a good rant but there was some good value this week with the post they don’t tax free time.  Like The Investor I've watched the London property market go insane so this comment

“But with London prices having moved from extreme to insane to “oh, so this is what my grandmother meant when she said flinched at 50p for a bag of chips that used to cost a ha’penny”...”

was particularly amusing.  Now every year I try and assess the house value of all the counties ofEngland and Wales so I already knew it was insane and really no longer a place for anyone who isn't an oligarch or money launderer.  Hell even the bankers can’t afford it any more.  In light of this throwing this chart together this week did make me smile:

Click to enlarge, London first time buyer gross house price to earnings ratios

Does this make my first picture today relevant?

2015 HYP Review

The vast majority of my low cost portfolio consists of low cost trackers.  The one big exception to this is my UK High Yield Portfolio (HYP), which has just completed its 4th calendar year and contains a not insignificant £60,000 or so of my hard earned wealth.

I am a big believer in passive index tracking as I don’t believe it’s possible to consistently beat the market over a very long time (think 40 years or so in my case).  So why did I start a HYP then?  It all centred on trying to understand my own psychology.  At some point in the not too distant future I'm no longer going to be in the portfolio accrual stage and instead will start drawing down on my wealth.  As a very early retiree my draw down phase is with any luck going to be a long time.  It could even be equivalent to my whole 43 years of life so far.  For me at least I feel that selling down assets to eat on a good day could be psychologically difficult even for somebody as rational as me.  I could only imagine how difficult it would be if Mr Market had tanked by 50%.  So with that in mind I set myself a task to position my portfolio to have a very good chance of being able to live off the dividends and interest only from my portfolio.

The HYP has helped me achieve that goal with my total portfolio dividends and interest (less the funds allocated for a home purchase) currently generating a yield of 3.6% against a planned retirement withdrawal rate of 2.5%.  With this now being well in control I haven’t had a need to add a great deal to the HYP this year.  Additions have been limited to:

• BP.  Bought in January 2015 and currently sitting on an annualised capital loss of -11.1% and a forecast dividend yield of 7.4%.
• Rio Tinto.  Bought in March 2015 and currently sitting on an annualised capital loss of -37.1% (ouch!) and a forecast dividend yield of 7.5%.
• Legal & General.  Bought in May 2015 and currently sitting on an annualised capital loss of -1.1% and a forecast dividend yield of 5.0%.
• National Grid.  Bought in July 2015 and currently sitting on an annualised capital gain of +25.3% and a forecast dividend yield of 4.7%.

The complete HYP and their respective values are shown in the chart below.  The purchasing rule that I follow is the amount of the next purchase is the median share value of the current portfolio (with the exception of RMG and S32).

Click to enlarge, Retirement Investing Today High Yield Portfolio

Further UK Equity Diversification

I am a disciple of Tim Hale who in my humble opinion is the investing granddaddy for UK investors.  From the emails I receive it’s rare that I can’t refer a reader to his book Smarter Investing: Simpler Decisions for Better Results for the answer to their question.  It’s a must read for anyone serious about investing from the UK.

It’s therefore probably no surprise to find out that my investing strategy is largely based around the teachings of his book (I started in 2007 and so I used the first edition as a basis).  At its most basic he starts with what he calls a Level 1 portfolio mix consisting of Level 1 UK equities and Level 1 UK bonds.  He then goes on to show how you might diversify a portion of your wealth away from these to create a portfolio for all seasons.  Importantly though no matter what your investment horizon large allocations always stay with the Level 1 building blocks.  So the question then becomes what Index should be used to represent Level 1 Equities?  As always Hale has the answer with “For your Level 1 equity allocation, the return benchmark should be the return of the whole domestic market, which provides a diversified and representative benchmark as it includes most public companies, be they large or small and weighted according to their market size... The FTSE All Share is the index of choice for the rational investor.”

I followed this guidance with no other exposure to UK Equities other than the All Share until late 2011 when I realised, that for me at least, I wanted more dividends than my strategy was forecast to give me at the end of my accumulation stage.  I therefore started to diversify a percentage away from Level UK Equities towards a UK based High Yield Portfolio (HYP).  Today that HYP contains 17 companies with 83% of them by valuation coming from the FTSE100 and 16% coming from the FTSE250.  I then continued with this strategy until I reached the point where it looked like my total portfolio would enable me to live off the dividends.  I’m fairly comfortably there now and so don’t need to keep growing my dividends at such a great rate.