February 29, 2020
Welcome to my latest portfolio update!
A few times each year I give you a backstage pass and share what’s been happening with our investments.
Given the last update was back in October, it’s time for another one.
And while ours isn’t the cleanest of scenarios (far from it), I feel obliged to share with you guys how things are going. There have been some small changes, but nothing drastic.
You ready? Okay, let’s take a look.
In the below chart is the latest breakdown of our portfolio at the time of writing. Figures are in percentages rather than numbers for privacy reasons.
Given I’m not really an anonymous blogger like many others, I don’t feel comfortable sharing the exact numbers. That would just feel weird.
By the way, I’ve decided to include superannuation from this point on. Even though super isn’t part of our early retirement strategy, it’s still becoming a decent pot of assets that we can access later.
With natural growth and given that we’re not living off this part of our wealth, it’s becoming a bigger piece of the pie over time. So I think including super gives a more complete picture. What do you guys think? Keep it in, or leave it out?
It’s funny – I only really update our net worth spreadsheet for these posts. Other than that, I don’t really think about it.
The recent sharemarket growth has surprised me when checking the value of our portfolio. Especially our super, which is invested in 100% international shares. Article on how I approach super here.
Each category appears smaller due to super being added, but really nothing has changed. If you’re a new reader, you might be wondering how we manage our cash in early retirement. This update explains our rather messy situation.
The higher loan repayments are being funded from cash sitting in an offset account, as well as any income that comes in from Mrs SMA and this blog.
Overall, we’re still relatively cashflow poor at this stage and it’s far from an ideal situation. But I’d rather this than being stuck working full-time, so no complaints here!
There are no plans to sell any property soon. We’ll probably re-consider in another year or two. The cash we have will last for at least another 2 years, maybe longer.
So how’s the portfolio going? Let’s take a look.
The markets keep climbing, which on the surface seems like a good thing. But this means the income streams I’m buying are getting more expensive.
In addition, very strong recent returns mean lower future returns. Well, at some point! Sometimes that’s the dark side of great performance.
That’s unlikely to be repeated this year. And for those who are buying, which is most of us, we should really be hoping for lower prices! Besides, it’s not healthy (or sustainable) for prices to grow faster than earnings and dividends for a long period of time.
And we’ve now had a little drop in the markets this week, so we’ll see what happens. Whichever direction it goes, the movements cause zero changes to how I approach our long term investing. Because it’s just that – long term!
People have been saying the markets are overvalued for many years now. And the doomsday people are getting all excited with the coronavirus news coverage spreading fear around the globe. The assumption is the economy and markets will now begin their inevitable downward spiral.
Are they right? Well, maybe. It’s pretty scary stuff. And I certainly don’t want to dismiss the pain of people dying.
But for those saving and investing for Financial Independence, it’s also important to put things in perspective. Remember, the world has seen much worse viruses in the past. And I mean MUCH worse – where millions of people died. Consider the following chart…
Look at the past tragedies. Note the sheer scale of them, compared to today’s crisis. Then consider the strong long term returns, despite all the scary things that have happened. Now tell me it makes sense to “wait it out” until things get better.
The world will have its ups and downs. And we never know what’s going to happen next. But unless you think we’re all screwed, continuing to invest on a regular basis is the only thing that makes sense to me.
Related post: Timing the Market: Silly or Sensible?
Property markets on the East coast have picked up since the middle of last year, which bodes well for our Brisbane property. Perth is so-so, but construction is still slow and the population is growing. So at some point, things will turn.
Rental markets have been improving across these two states as building and investment is weak. Even in Perth, the vacancy rate is now down to a very healthy 2.1%, according to SQM Research. That’s down from a frightening 5-7% a few years ago!
Anecdotally, we’re now hearing about some busy home opens. So with a bit of luck, we might see some rent increases in the next couple of years (we’ve had an increase at one property so far).
Since the last update, we’ve done a few buys and a few sells. So first, what did we buy?
Most recent purchases have been adding to our Aussie index fund. With my growing appreciation for indexing, plus that we already have most of our portfolio in LICs, I’m happy to increase this over time.
I also decided to sell our REITs and use these funds to top up our holding in QVE. Why? A few reasons.
Well, REITs have been flying for the last couple of years. The property portfolios they own have increased in value, but only a bit. Despite this, many REITs are up more than 50% in the last 12-18 months.
They’re now trading well above the value of their net assets (in many cases at a 20-30% premium). In short, they’ve become overpriced (in my view). We bought them when they were attractively priced, but now they look to have less upside potential than our other holdings.
Given our low income situation, we were able to sell these tax-free and reinvest elsewhere. Add to this, my increasing love of simplicity, and the decision wasn’t too difficult.
Also, QVE is a value-focused LIC which has struggled in the last couple of years and now trading at a large discount to NTA. So this was my very own unsophisticated form of re-balancing (selling what has outperformed and buying what has underperformed).
Sometimes that’s not easy to do. But if nothing has drastically changed with why you bought a certain investment, you should probably be buying more when it’s doing poorly.
The same goes for index funds too, of course. Okay, here’s how the portfolio looks now after these changes…
That’s right, we now have zero individual holdings! Nothing but a few LICs and an index fund. And I gotta say, I really like the simplicity of having less holdings!
As I’ve stated previously, the goal is to build our portfolio for cashflow first, and later add international shares for extra diversification and higher growth. But with super approaching 20% of our net worth, allocation to international shares is growing faster than expected.
By the way, I appreciate this may seem an unorthodox way of doing things, but we’re happy with it 😀
Here’s where the magic happens. Let’s take a look at how our income is tracking so far this financial year, using the 6 months to the end of 2019.
These figures include franking credits, but no interest earned from peer-to-peer lending. I’ll include this in the mid-year update after I get the proper tax statement from Ratesetter.
At this stage, we’re on track for a small increase on last year. This is primarily due to more cash going towards mortgages rather than investing. So, unfortunately, that blue line won’t be leaping higher like in past years! But as long as it increases, which it almost certainly will, I’ll be pleased.
Given that we now have less in high yield investments like Ratesetter and REITs, this would also mean a small reduction to the annual income figure. But that means nothing in the grand scheme of things.
Aussie companies have been a mixed bag this year when it comes to results and dividends. Companies like Westpac and NAB both reduced their dividends.
But other major companies like BHP and CSL had strong increases. Overall, ASX dividends are probably going to be flat in 2020, with the old LICs keeping their dividends stable for the half-year so far.
That’s it for another update. I’m interested to see how the year progresses after such a strong run in the markets over the last 12 months or so. And as you might expect, we’re looking forward to receiving the next round of dividends very soon!
I continue to enjoy the income and simplicity of owning shares, and secretly hope someone lights a rocket under Perth property soon so we can offload a few of these assets sooner – haha 😉
I’ll share any new happenings with you in the next update, which will be mid-year. But for now, how is your portfolio going? Share any progress, wins and milestones in the comments!
By the way, if you’re interested in the chart I use to keep tabs on our Annual Investment Income, you can get it below…