Saturday 28 March 2020

Rebalancing vs taxes vs expenses vs life

With us now being only a single working week away from the new UK financial year and the investment world still feeling the impacts of the COVID-19 situation I thought it might be worthwhile sharing a little about how my portfolio and life is changing given where we currently find ourselves.

Let's start with what my investing strategy, something I first shared way back in 2009 but wasn’t really finalised until 2012, tells me to do.  For this post there are three important pillars:
  • If any of my assets, diversified by country and by asset class, gets more than 25% away from the plan then I will either sell or buy as appropriate to move that asset class back to plan
  • Minimise taxes meaning I keep more of my wealth for myself
  • Minimise investment expenses also meaning I keep more of my wealth for myself

It’s also worth sharing some other information that helped inform my recent decisions:
  • My gold had become 25% overweight
  • My bonds while not 25% overweight were well overweight
  • The UK 2019/20 capital gains tax annual exempt amount is £12,000.  It’s also worth adding that I believe if you sell assets worth more than £48,000 or have gains before taking off losses of £12,000 then you will also have to complete the tax return capital gains summary pages.  Not a financial negative but a time waste worth avoiding if it sensibly can be.
  • Once this COVID-19 problem passes it’s looking more and more likely that we’ll be Asian bound for the next part of our FIRE journey.  We’ve still not finalised plans, as we’ve learnt we have no need to rush these types of decisions, but we’re confident enough to start (continue?) shifting our asset allocation over the coming 6 to 12 months.  That involves moving our equity investment bias (may be controversial for some but it’s always been part of my strategy so I’m not changing it) from the UK (HYP, VUKE, VMID) to Asia mainly in the form of the Vanguard FTSE Developed Asia Pacific ex Japan UCITS ETF (VAPX).
  • VAPX only went ex dividend/distribution on Thursday with all my Vanguard equity dividends/distributions being paid on the 08 April 2020.
  • Within my portfolio I have pensions (all SIPP’s), an ISA, NS&I Index Linked Savings Certificates (ILSCs) and plenty of non-tax efficient investments. 

The first actions taken were to use up some of that £12,000 capital gains tax annual exempt amount meaning I had to do some pruning within my non-tax efficient investments.  I therefore sold all of my AstraZeneca (AZN) shares and sold half of my non-tax efficiently invested gold.  These sales released £25,000 of cash for a £10,000 capital gain.  I used that cash to buy VAPX.  I waited until Thursday to do this otherwise I would have received VAPX dividends on that investment amount which would have then been taxed.

My ISA gives me periodic trading credits some of which were due to expire in the next week.  I therefore chose to sell some bonds (INXG in this case) and again buy VAPX.  Trading cost was £0 but there were of course buy/sell spreads.  This was only a very partial rebalance.

I took no action in my SIPP’s or NS&I ILSCs.

After netting off our future home purchase funds as of this morning my portfolio now looks like this:
RIT asset allocation net of future home purchase funds
Click to enlarge, RIT asset allocation net of future home purchase funds  

That is a portfolio that for me:
  • has 3 years of expenses in cash which is where I want to be
  • is still 17% overweight in bonds but no opportunity to minimise expenses or taxes so no action planned unless the equity markets continue to fall triggering a rebalance
  • is 23% underweight property so no active rebalancing (yet).  If the market doesn’t move greatly in the mean time I’ll use some of my Vanguard dividends in an investment wrapper that also contains property to passively partly rebalance here.
  • is now 13% underweight gold.
  • is 6% underweight international equities.
  • is just right on emerging market equities.
  • is 14% overweight UK equities.  This week I’ll use my remaining capital gain exempt amount to sell down more of the HYP and buy VAPX.
  • is 7% underweight Australia/Asian equities.  That will be just right post the HYP sale.

It’s probably also worth just sharing how my portfolio is faring in the current market.  From their respective peaks by my calculations the S&P500 is down 24.9%, our FTSE100 is down 28.2%, the Nikkei225 is down 19.5% while the ASX200 is down 32.4%.

In comparison from peak wealth my portfolio is down 15.1% when measured in £’s and if I measure in the currency of our likely new home, I’m down a more modest 11.9%.  In £’s wealth is back to levels seen only 4 months prior to when we first FIRE’d and in the currency of our likely new home we’re still well above levels seen on FIRE day!

In conclusion, the RIT household is importantly safe and healthy at this current difficult time.  Friends and family are thankfully in the same situation.

Our financial situation is also still strong thanks to my FIRE plan that was enacted way back in 2007.  Thank-you FIRE!  One of the best life decisions I’ve ever made.  Unfortunately, some friends and family are already starting to squeak here.  It’s not serious yet but if this goes on for much longer it could fairly quickly become so.

While this time is giving the planet some much needed respite, I therefore truly hope it doesn’t go on much longer.  What I do hope though is that post COVID-19 people in the world act somewhere between what we have today and what we had.  Maybe a bit more work from home, more free exercise in the great outdoors with family/friends rather than that monthly gym membership, more healthy cooking at home rather than that favourite restaurant, less buying of stuff that doesn’t bring us value which just might even lead to more time with loved ones and more financial security.  It wouldn’t be full strength FIRE but some might just find it improves their life.

Have you been taking any action yet?

As always DYOR


  1. I was surprised to see I could find some gains in Europe and Japan trackers. They are both ACC, which was foolish for unsheltered, so I want to convert them to INC, but being conservative on the exact capital gains on all those auto-reinvested dividends. I was planing to add to Japan trackers inside my ISA, but I might put the unsheltered rest in VAPX, which I'd not thought of. Always keen not to too many different holdings in SIPP/ISA/GSA for the admin. So the Vanguard SIPP dividends + £2880 will add to my S&P 500 tracker, where I am very low.

    I do wish Vanguard moved their dividends away from the tax year end, you get 3 dividends one year, 5 the next, which distracts.

    Could you make this box more than 5 lines?

    1. I'm sure you're aware but just in case VAPX is Asia Pacific excluding Japan. For Japan I use Vanguard's VJPN.

      Re: 5 lines. That seems to be a Blogger 'feature' that I can't change in my settings. What you can do though is grab the 2 diagonal lines in the bottom right corner of the comment box and drag down to make a bigger comment box.

  2. I started pulling everything I had in P2P out about six weeks ago and completed it yesterday. There's still a few bits and bobs left but 95+% of what I had in it is now either sitting in cash ISAs or premium bonds. I now have about a decade's worth of expenses in cash. I'll be looking for a home for some of that over the coming year.

    I bought a £500 gift voucher from a local business that I'd like to see return after the lockdown is over. Also cut off some big branches down in my wood so I can start cutting them up for logs and seasoning them for next winter.

    I'll keep dribbling most of my monthly paycheck into the personal pension (which has had a 20% hit in value over the last few weeks, but that only takes it back to early last year IIRC). And, I'm close to a decade away from starting to take it.

    1. My P2P will be used for the home purchase and I still have about £50k with P2P. As long as this COVID-19 problem settles down soon I expect that will be in less than 12 months from now either way. I've therefore started moving my P2P as it matures from "1 year" to ready "Access". Within a year I expect I'll have little to no P2P as I don't want my 3 years of expenses in something that carries that level of risk.

      Good idea on the gift voucher. Enough to maybe provide a bit of support but not enough to hurt you if they go bankrupt during this.

  3. Being 90-95% equities in normal times, I sold 40% after being hit by -10%. It was clear that no good news will be forthcoming in the next few quarters, perhaps the whole year or two, so it was a logical decision. Have since bought some of the same positions back, but cheaper. Cash currently still stands at 32%. Silver 3% (as an insurance). Rest is shares. I am in for the long haul, but I expect more bad news ahead. We are not out of the woods, yet. If I was a pension fund that bought at the very top, my manager would be screaming at me for poor performance and wanting to recoup losses (means more sales at the right moment, next significant rise).

    Just remembered - above does not take into account occupational pensions (empty promises) and RE (a chunk of primary residence). I was always trying to minimise RE exposure (I feel I am overweight and do not understand people's obsession with it. It's the gearing that they love, but if you geared your shares the same way you gear property, then you would retire earlier) and if I could, would happily sell and plunge proceeds into shares and rent, but my circumstances do not allow for that (not a financial decision). Perhaps for the better (spreading risk and all that) :)

    Looking at evidence now I take a stance that Covid19 situation will not resolve itself quickly, bar some miracle with antiviral drugs, or some other black swan event (perhaps we will be lucky with effectiveness of antibodies of recovered patients on ICU admissions that they are now trying in China). I also think a quick vaccine is a lot of nonsense, but more importantly - that structural problems in the financial sector have been mounting up for some time (FED's put, as they so eloquently call it, cannot last forever; plus what will the West do with all that public debt?). This does sound like more taxes and more inflation is in store in the future (inflation is beneficial for govs) and with closed borders and disrupted supply chains goods should increase in price.

    This is interesting, because that does mean we all should be in shares again. Yet looming job losses are defationary and even might invoke deflation (hope it will not come to that and if it does, gov will not allow it, so chance is slim). So the only question is: where is the bottom and are we happy to ride this rollercoaster in turbulent times? Those who hold large portions of bonds, by the way, are bugged by the same question. They want to market time it so they forgo the large loss and then buy cheap shares after this structural tsunami. Not convinced that it is easily doable. And holding bonds at current yields (unless they have been purchased with significant haircuts) is just crazy long term. They should sack their financial advisors for making them poorer. And this is all before the word Brexit has even been mentioned.

    P.S. right choice to abandon P2P. These are like unregulated startups - a lot of will not pay out when it comes to the crunch.

    1. My problems with P2P are multi-layered:

      There's poor oversight of the companies by the regulators - although getting better.

      A number of the P2P companies are turning out to be poor assessors of loan risk and value of anything secured against loans. Some aren't that great at pursuing bad debt or tackling outright fraud. Few were around to be tested by the 2008 recession, and some were already struggling in the "good times". I doubt any of them are too big to fail.

      The businesses and individuals taking out loans are often those who would struggle to get them elsewhere.

      Add in the economic tsunami that's about to hit and it doesn't look good all the way up.

  4. Good to hear that you and your family are fine, RIT.

    My only sale so far has been half of my holding in VUCP, which was a beacon of green (+4%) in a sea of red so I used the cash to top up the poorly equities.

    I'm continuing to invest when I have the cash - no idea if we're at the bottom, so since I've been investing as the markets have been going up these past few years, it makes no difference to me that I invest as the markets go down.

    All the best to all during these tough times!

    1. Good to hear from you weenie. I tried to post a comment on your last blog and for some reason it was eaten, twice. Not sure if it's in your spam or whether a problem at my end. Can't remember the question now though. Must be old age! LOL.

      All the best to you and those around you as well.

  5. I have always found it a bit odd RIT that you seem to deal with your investments in total isolation from the rest of your family. For reasons of confidentiality I can see that there may be problems doing that . Does your wife pay CGT or at least try to use up her CGT allowance each year ? If not - why on earth do you not transfer some assets to her so she can use up her CGT as well ? Probably perfectly logical explanation - but can you give us a tiny bit more info on this ?

    1. Hi stringvest

      That is a very long story with a couple of them at a high level being history and confidentiality. I've mentioned before that Mrs RIT does have a portfolio, which is significantly smaller than mine, but for now less tax efficiently invested. She is therefore also using as much her capital gains tax annual exempt amount as she can.

      Worth also adding that in the RIT household her and my portfolios are not looked at in total isolation and apologies it comes across that way on the blog. I won't say much more to protect the innocent.

  6. It is hard to sell assets that have not performed as you had hoped or expected. A commonly suggested way to help " get over " this is to ask yourself - would you buy this asset now to add to your portfolio if you did not own it already. It is never as simple as that but you can also consider whether holding on means you are accepting likely reduced returns to persist and are missing out on an alternative that might perform better . Obvious really.

  7. What is it about teasing us by not revealing your planned destination ? We won't care if you change your mind , plan not to go anywhere after all and maybe buy a house in UK. Are you worried that you may be seen as being indecisive and not in control ?

    1. You know how much of a tease I am :-)

      On a more serious note this one is a long road and we are in the very early days. This is a much much bigger life change than Cyprus/Spain/Malta with much stronger pros but also much stronger cons. We therefore want to ensure we give the UK a fair FIRE go and prior to this COVID-19 situation we have been looking back at places like Herefordshire again. What we do know is that we do not want to be where in the UK we are now. For now the UK is home and we're trying to really understand if it could be our forever FIRE home.

      We also may not get the visa so we don't want to get our hopes up too much. Visa processing times are also long so we also don't want to get ahead of ourselves.

      At this point I'm just trying to show how my investment portfolio can adapt tax and cost efficiently as life probabilities change. I'm also trying to show that I'm treating the move as a process rather than a one of event. A kind of pound cost averaging I guess...

      Get past this COVID-19, then a few more months of deciding if the UK is home and an approved visa. That should be the point I open up a little more.

  8. Thanks RIT . I always wonder whether my directness will be seen as offensive . I know some ( and not just RIT readers ) do think just that - but you, RIT , seem to cope . I expect that this was a common situation that you had to deal with at your work. My work was as a GP partner in a large and very busy , multicultural and multi- economic practice - with multicultural /multi-ethnic partners . We had weekly business meetings but hardly ever voted on issues - mostly people wanted concensus. Clearly this was frequently hard to reach but decisions were fudged - agreements were agreed ( sic ) then some just followed want they wanted to do themselves . Chaos . Maddening .And almost impossible for your staff as they had to learn which ways each partner wanted to work.

    I think my style changed to being more direct and punchy - just to try and cut through the crap.

    1. When I was in my previous job (I know longer call it work as in the end I now know it wasn't that) I found the best method to communicate was to:
      - present the data
      - discuss the data and not the person as then it's not personal
      - seek feedback on the data and discussion

      That method also flooded over into my personal life for 'difficult' conversations. It does make me a bit robotic at times but it sort of works.

      I never see your comments as direct or offensive. Quite the opposite actually. You never attack the wo/man while your approach is always challenging causing me (and hopefully others) to think. That is one of the reasons I stay at the blog given the accountability to myself piece is now largely over given I've achieved FIRE so I always look forward to your thoughts.

      If I was starting the blog again I'd probably do it a bit differently. Maybe a bit less financial sharing which might have allowed me to share a bit more elsewhere. But we are where we are and I think on balance it's better I stay here rather than start something new. The predominant reason is that if someone wanted to start on the road to FIRE there is now 11 years worth of warts and all story on this blog, along with plenty of thoughtful comments on each topic, allowing someone to track my entire journey. Hopefully that would allow them to maybe make a few less mistakes, decide what's right for them and maybe even achieve their goals in a more appropriate way.

      This blog has never been about perfect as I'm not selling anything. I've just tried to share one person's continual journey to a happier and more valuable life.

    2. I always suspected stringvest was Doc Martin.

  9. Pops 321
    I have had fever, persistent cough and lost my sense of smell.....and whilst this was a relatively mild version of a flu (and probably the Choronavirus) at the time finance was the last thing on my mind and it brings everything into perspective. Day 10 and over the worst I think.

    My pension with the Pru is expensive but I guess it brings the balance you are achieving. Its a protected fund but of course that hides the underlying fund value...AND it has been adjusted from £530k to £470k. I also have £130K in cash also in the SIPP, I need to transfer that and move to a low cost provider and actively manage that now markets are lower.

    Physical Property is my main holding and so far no issues from tenants and my moral values would mean I will be very tolerant (what choice is there anyway). If they all pay something it will be enough.

    Just need to tidy up the £20K ISA and £12K SIPPs I opened in 2018 which are still cash. I would put them into Gold but not sure how to get a fund with integrity and supported by the physical gold behind it.

    I guess unlike you I will sit on my hands, markets will dip and rise and I will lose and gain passively missing out on many an opportunity to do better. Like the vast majority of UK plc.

    Stay well....look forward to hearing on your future travels. You know I am very Yorkshire and family orientated and any thoughts of being abroad do not appeal to me. Probably re-enforced at the moment as some ex-pats are feeling it in Spain, the UK is no paradise but its what I know. You have a wider experience so understand the benefits and risk so wish you well whatever you decide.

    1. Hi Pops

      Really glad to hear you're coming out the other side. We're all still untouched. TBH I'd prefer to have had it and recovered at this point so envy you and I don't envy anyone.

      Do you have a view on how much your portfolio is currently down? Our approaches are very different so it would be interesting information.

    2. The shares plummeted but only a small % of my assets. They dropped from £26k to about £13k.

      The invested SIPP dropped £530k to £470k.

      The cash element of SiPPs stayed at £165k

      The S&S isa still at £20k and added £10k last week. Still in cash with Halifax Share Dealing.

      I also hold significant cash deposits ie £300k and another £240k which WAS (and still might be) tied into a property purchase. Coronavirus may alter that but it’s very complex because we have exchanged contracts but we built in a two year exchange deadline which is due soon so I may walk away....depends on how badly off that leaves the seller who is buying a newly built home. Technically I can get my deposit back...but they will lose theirs.

      Property overall....the hidden misery. It’s not visible but it wouldn’t surprise me if I don’t lose £300k over the next year or so. However, I buy cheap and renovate so unlike shares I can buy below ‘retail price’ unlike many modern day dinner party BTL’ers. So any loss will be a paper loss from a theoretical high.

      I guess many true expert share traders view their share portfolio the same way I view the they buy well and losses now are probably not real (for them).

      Anyhoo...I will hang on. My plan is to sell up as things come empty. Even with a good 50% house price crash I can still do that.

      Total loses
      £60k pension (about 12% of invested fund)
      £13k shares (50% drop)
      £x property. Potentially significant.

    3. Are you sure you've lost 50% with your shares. The FTSE100 from peak is 'only' down 29.4% whole the S&P 500 is 'only' down 26.5%. Do you know what is driving the big decline?

    4. Single share down 50% since mid Feb. That’s why it was a relatively small amount. There are several in the FTSE 100 that have tanked. Ouch.

    5. For me it always feels counter intuitive to re balance ie if Asia plummets and fundamentals disappear in that area then it seems counter intuitive to then put more into the failing areas of the portfolio.

      As an aside the re-balancing you do is tried and tested. I have seen it used by funds managers, so I am not challenging it rather I find it difficult to do.

      I guess you have to believe the balance you want is right and fundamentals are still there.

  10. Yes, I agree with you that this is giving the planet some much needed respite. Like you I really hope it doesn’t go on too much longer. Stay safe.

  11. Hi RIT, if you decide to move, will you buy a single-country equity ETF / bonds in the currency of your destination?

    Glad you and yours are keeping safe and well!

    1. Hi TA
      Yes, that's the plan, just like I ended up with VUKE/VMID here. Additionally, if the ETF/fund holding local equities is locally domiciled then there are significant tax advantages to be had.

      Looking a little wider than asset allocation and more to come but crudely:
      - Leave SIPP's in the UK. Plan to take tax advice but initial research suggests no advantage to moving. Can't QROPS into a local pension scheme at this point and to put one into an offshore location seems like risk, expenses and complexity for no real benefit that I can see at this point.
      - Leave ISA's in the UK for 1 to 2 years. They'll be fully taxed but just in case we want to come back to the UK I don't want to have to start again.
      - Non-tax efficient. Move pretty much all of it to the new country. Still need to think how to handle the NS&I ILSC's that will be left post home purchase/build.

      Hope you and yours are also keeping safe and well?

    2. This is a whole new dimension of planning for you to think about. You must be in your element :-) Will your overall tax position improve or worsen in the new country?

      All well in The Accumulator bunker. It's an interesting time to take stock and reflect on what really matters to us.

    3. Good to hear all is well in the TA bunker.

      At this stage I think our tax position will worsen, a lot, as we'll lose the tax efficiency of ISA's. Don't want to let the tax tail wag the life dog though. For us when considering locations it's always been a consideration but not a driving force.

  12. Looking forward to welcoming you to Asia!

    Lived here 17+ years and I feel certain you'll all love it. The vibe, passion and energy are all palpable. Oh, and the food....and tax. And weather. And...

    I've followed your blog for the last 5 or 6 years and enjoyed it totally.

    I've FIREd, twice (but I'm old anyway) and in effect followed the FIRE methodology for years without knowing it as such, until I discovered your blog, for which I thank you.

    Would be interested to see where you land, but as I say I'm sure you will enjoy wherever you end up. I have three long term visas in the region that enable me some flexibility when I feel like a change.

    Wish you all the best.

    Stay safe, stay healthy, all!

    1. I always enjoy your posts and watch with interest your overseas plans. Your return from Cyprus resonated with me as over 20 years ago I burnt all my bridges in the UK and moved overseas to join my estranged wife and toddler daughter. God was it difficult - no job, didn´t speak the language and a tricky relationship. So many times during the first year I wanted to return to the UK - but I persevered. Many times I regretted my decision in particular I felt I had given up a successful career and all the self esteem etc that goes with it. When I read about you brave decision to return from Cyprus I wondered how my life would have panned out had I done the same 20 years or so ago.

      Again I was reminded of how difficult moving overseas is when I thought back to 2011 when my wife, daughter and I returned to the UK with the idea of my daughter doing her A Levels and maybe going on to a UK uni. I intended to purchase a business and had been negotiating with several whilst overseas. But the kibosh was put on everything due to the unhappiness of my daughter who was crying every night longing to go back home. Of course my wife was severely affected by my daughter´s unhappiness and finally we agreed to scrap ideas for a business and return after A levels. The irony was that as time went on my daughter settled down, found a great boyfriend and happy daughter, happy wife! But all too late.

      Moving overseas is difficult and even more so when all members of the family have to be on board with the idea.

      Getting back to finance - one thing I appreciated about the UK when I was overseas was how generous the UK tax system can be. We too often take for granted the ability of a couple to shelter £40k/year in ISAs, £24k of cgt allowance, £25k of personal allowances - which means you can have a pretty good income completely free of tax. Most tax regimes are far less generous and now with international bank reporting its not so easy to "accidentally forget" about your UK frozen tax exempt accounts. Getting involved in double taxation treaties, getting the appropriate certificates from UK providers means keeping investments in the UK is complicated - but probably essential in order to keep all future options open. I am sure you have investigated this in great depth and there are countries where even if you are legally resident there you can opt to be tax resident in say the UK if you have a home there and more than 50% of your income comes from the UK.