In the last couple of years, it's fair to say we've experienced both good and bad periods of investment performance.
Today, the FTSE100 is hovering around 6,000 which is a year-to-date fall of 20%, but my combined portfolio return is 'only' down by 7.5%, so I suppose it's not doing too badly in the grand scheme of things.
Psychologically, it's best to think of losses in percentage terms because even 7.5% represents a shitload of the actual folding stuff !
So what have we learnt ?
1) Well, some holdings don't seem to contribute much to the portfolio under any circumstances :-
RCP.L was bought a few years ago as a 'defensive' holding, but despite its track record over longer time periods it hasn't done very much at all for my portfolio. It doesn't throw off anything significant in terms of a dividend, it doesn't produce much of a capital gain during rising markets (fair enough) but it didn't provide downside protection during the recent sharp slump either, falling by almost the same amount as the markets.
Although to be fair, it hasn't actually lost me money yet in nominal terms at least, it certainly hasn't displayed the more defensive qualities I'd expected in terms of holding onto at least some of its gains from the good times, which is my own fault for not sufficiently researching its composition. I might as well have just kept the cash in the accounts for several years.
However, I'm keeping an eye on it now - when / if the markets return to some sort of normality, I'd expect RCP's price to have risen too, due to its equity components and maybe the re-establishment of a premium to its NAV (although that could take a long time for many of the stricken ITs). I'll then probably sell out and either hold the proceeds as cash or re-invest in something like CGT.L.
2) Some holdings are proving to be quite effective diversifiers in the downturn, so far at least. Most of the equity-based funds have been hammered, but the bonds and bond-heavy funds including my Vanguard UK Index-linked and Lifestrategy 20 are doing OK. Despite a decade-long argument in financial circles about the usefulness of bonds, they seem to doing their stuff when it matters.
3) Not for the first time, I've been wondering if it's worthwhile continuing to contribute to the portfolio.
Sure, I'll keep making regular employer's contributions to the SIPP for as along as the company's cash holds out, but is there now any point in adding my own money to the ISAs each year ?
Even in less volatile times, the portfolio is now of a size that means normal market movements can gain or lose the equivalent of many months of regular additional contributions in an instant.
You might think it's a smart move to keep taking every available tax break on offer, but it's not as clear-cut as that. Paying myself more than enough to live on, i.e. to generate extra cash for investing, actually incurs a tax charge because there's now only a £2,000 tax-free allowance for dividends received.
Therefore taking, say, an additional £20k a year from the company purely to fund the ISA costs me at least 7.5% in extra income tax (this rate jumps to 32.5% for anything that strays over into the higher tax band for the year). But assuming I'm still a basic rate taxpayer and the £2k allowance has already been used, then I'd need to take a further dividend of £21,622 to leave £20k net for investment, and don't forget that this £21,622 actually started off as £26,693 of company profits - it has already been taxed once at 19% in the form of corporation tax.
So, and leaving aside the issue of double taxation, is there a corresponding £1,622 per year compounded tax benefit in shielding future capital growth and income generated by £20k within an ISA ?
Perhaps if you're twenty years younger than me, with a much longer investment horizon, and you think you can consistently generate double-figure annual returns, then it's probably worthwhile taking the tax hit early to accumulate assets inside the ISA shelter before the pot size reaches a certain critical mass.
It's a bit like in the old days when there used to be a tax on off-course betting on horse racing, you could either elect to pay the tax on your stake upfront or have the same percentage deducted later from any winnings. Paying the tax on the stake was only ever the best option if you consistently backed winners, because every time you lost then you'd also handed over tax which you didn't need to ...
So, from the start of the next tax year commencing in April 2020, and nearly four years on from when I first thought of it, I'm not intending to withdraw more cash from the company than I need for spending.
Windfalls or apocalyptic market crash opportunities aside, there'll be no fresh cash added to the ISAs. I'll just continue to re-invest the natural yield of the portfolio.
No comments:
Post a Comment