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. (( I’m using my 2019 level of expenditure here since Covid has meant that I am currently spending quite a bit less ))

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. (( The split between the UK and international stocks is now obsolete, but the numbers are otherwise pretty accurate ))

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.