Annual Portfolio Review 2021

It’s that time of year again. Today we’ll be taking a look at how my overall portfolio performed last year. Stay tuned for the Annual Portfolio Review 2021.

Headlines

Let’s start with the usual scene-setting:

• I run a large and well-diversified multi-asset portfolio.
• I’ve been in decumulation (retirement) for quite a few years and I have dependents – so I can’t take on a high level of risk.
• I have a decent amount of non-listed assets (45% of property and DB pensions) which limits my risk asset exposure (equities are usually at close to 40%).
• I’m more interested in steady long-term compounding than in shooting the lights out during a good year for global stocks.

Our net worth increased by 9.5% in 2021 – my thirty-seventh up year in 38 years of investing.

• The listed portfolio was up by 13.7% but the unlisted portfolio (in particular, property) did less well.

Most of the stockpickers on Twitter are reporting much bigger gains than me, but as usual, I am happy.

• Compounding at sub-10% pa has allowed me to retire early, and I don’t ever expect to run out of money.

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My blended benchmark was up 11.9%, so I am a couple of percentage points down this year.

• UK Inflation increased significantly but closed the year at 4.6%, so adding on my target SWR of 3.3% gives a target of 7.9%, which we have beaten.

In practice, my actual withdrawal rate is around 0.7%, so my personal target would be 5.3% (again, easily beaten).

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Because the portfolio is now a lot larger than it used to be, this is actually my third-best year ever in currency terms (pounds gained).

• My net worth increased by the equivalent of around thirteen years of living expenses.¹

I now have around a net worth equivalent to 151 years of living expenses.

• With an average life expectancy for me and my partner of 26 years, this gives a “death ratio” of 5.8 times (up from 5.1 times last year).

Performance

We’re up 9.5%, and our average life expectancy has decreased by one year, so we’ve gained 10.2% on that basis (9.5% plus 0.7% for one year’s withdrawals).

Rather than use UK currency, 2006 is baselined at 100, so that the portfolio is now worth 406 (up from 371 last year).

• Total growth over 15 years is 306%, or 9.8% compound pa.

This is acceptable given that it includes the 2007 financial crisis and thirteen years of low interest rates.

The chart below breaks the growth out into annual chunks:

Benchmark

I use a composite benchmark made up of four items.

• It’s intended to be the average for a UK private investor aiming to reach financial independence.

It has four components:

1. UK stocks – 20%
2. International stocks – 35%
3. UK residential property – 25%, and
4. Cash/bonds – 20%

The weights start from allocating a target percentage to property and cash.

• I then divide the remainder between UK stocks and international stocks.

Note that I use DB pensions and cash rather than bonds proper (which I consider to be overvalued).

Over 15 years the benchmark is up 107.6%, or 5.0% pa.

• So my portfolio has on average outperformed by 4.8% pa (in nominal terms – see also the more detailed analysis below).

Here’s a year-by-year breakdown of the performance of the portfolio and the benchmark:

Asset allocation

Unlike many bloggers and Twitterati, I use a “total wealth” approach to my portfolio.

• This is primarily so that I maintain a high enough allocation to equities as I get older.

I use five high-level asset classes (last year in brackets):

• Equities 40.9% (40.9%)
• Equity Alts 32.2% (32.6%)
• Bonds/Cash 7.4% (9.5%)
• Bond Alts 13.7% (13.3%)
• True Alts 5.7% (3.6%).

The second chart shows how these assets have grown over fourteen years.²

The third chart shows the same data in percentage terms rather than absolute numbers:

Portfolios

I have six listed portfolios:

1. The core passive portfolio
2. An active UK stock portfolio, split between AIM and the main market
3. A theme portfolio (ESG, tech and biotech)
4. A factor fund (smart beta) portfolio
5. A VCT portfolio,
6. And a trend-following (momentum) portfolio

I also have three non-listed “portfolios”:

• Property, including the house I live in
• DB pensions
• Cash

The table below maps the portfolios onto the high-level asset allocation that we’ve seen previously:

The red section is a stress test showing the impact of a 40% crash in global stock markets.

• Also worth noting are the running costs of the portfolio, now down to 0.35%.

I’ve added a few bar chart indicators, but I’m not sure they make things much clearer.

Accounts

Apart from the 27% in property, another 50% is in SIPPs and ISAs – that’s 77% of the total accounted for.

• The remainder is split between DB pensions (13%), Cash (6%), VCTs and taxable accounts.

The two charts below show how these account types have varied over the years, in absolute and relative terms:

New money

The long-term annual returns of 9.8% pa are flattered by three (overlapping) things:

1. new money
2. inflation
3. the positive performance of the benchmark portfolio

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Let’s look at new money first.

The chart below show the net extra contributions to the portfolio (from income and inheritance) or withdrawals (from pensions) by year:

The chart also shows a cumulative total for the entire period (the red line), and then increases this to reflect inflation (blue line) and benchmark growth (green line).

• New money totals 42.1 of the total portfolio’s value of 406.
• After inflation, this rises to 47.3
• After benchmark growth, it rises to 72.0

Alpha vs inflation

The chart below shows inflation over the last fifteen years:

• Total inflation has been 41.3%, or 2.3% pa.

The second chart shows the portfolio against new money and inflation:

• the green area is the initial portfolio plus inflation
• the blue area is the new money added plus inflation
• the red area is the value-added (alpha) from investment choices

Of the current portfolio value of 406:

• 142 is the base portfolio plus inflation
• 47 is new money and inflation
• 217 is alpha

Alpha vs benchmark

The next chart shows the growth of the benchmark over the years:

The benchmark is up 107.6%, or 5.0% pa.

The next chart is the portfolio against new money and the benchmark:

• the green area is the initial portfolio plus benchmark growth
• the blue area is the new money added plus benchmark growth
• the red area is the value-added (alpha) from investment choices away from the benchmark portfolio

Of the current portfolio value of 406:

• 208 is the base portfolio plus benchmark growth
• 72 is new money and benchmark growth
• 127 is alpha

Counterparties

Here’s the complete pie of counterparties.

Counterparties to whom I expect to increase my exposure in 2022 are:

• “Trading Apps” (Trading 212, Stake, Lightyear, IG, eToro, IB).

Turnover

I still haven’t got around to adding turnover analysis.

I’ll stick with last year’s guesstimate that I trade around 25% to 30% of my listed portfolio (12% to 15% of my total net worth) each year.

• That translates to an average holding period of somewhere between 3 and 8 years, depending on how you look at things.

This is, of course, an average, and includes positions that I have held for 30 years as well as others that are only open for a few days or weeks.

Snowball

I’ve also updated the snowball charts from the post I wrote in February 2020.

Here are our cumulative earnings.

And here is the chart of the rolling 10-year average.

Here is the net worth snowball.

Here is the exponential version.

And here’s the breakdown by assets.

Here’s a chart of net worth compared to cumulative career earnings.

And here are the annual portfolio fluctuations as a percentage of salary.

Daily returns

During 2021I tracked daily changes in valuation for the first time.

• I’m more interested in volatility than actual returns.

I also want to see how much my listed portfolio varies against my overall net worth and against my tailored benchmark.

Here are the daily and cumulative movements.

And here is a distribution of daily returns, to which I have fitted a polynomial curve.

• The daily movements appear very small – the best day was +1.4% and the worst was -1.5%.

Most days are in the -0.1% to +0.3% range.

• It should be noted that since my annual living expenses (my withdrawal rate) are just 0.7%, the daily movements still feel pretty lively to me.

I also calculated a Sharpe Ratio from the daily movements, which was 1.7 (pretty good).

Conclusions and outlook

That’s it for today.

• This has been another good year in financial terms, and a boring one in life terms.

But we’re better off in January 2022 than a year ago, and things should improve through this year.

• Until next time.

1. I’m using my 2019 level of expenditure here since Covid has meant that I am currently spending quite a bit less [↩]
2. The split between the UK and international stocks is now obsolete, but the numbers are otherwise pretty accurate [↩]