The 2021 Portfolio
Well, it's that time of year were you come up with a whole list of New year Resolutions only to blow them out a few weeks later. I have decided this year that I'll be giving up Bobsledding and Base-Jumping for my New Year Resolutions [wink].
I do have a serious resolution though and that is to try and close the gap between our actual net worth and our FIRE number. I've talked about it extensively in the post but I retired earlier than the FIRE "Rules" say I should have. I won't bang on about it as it's been covered a few times before but to put it as simply as I can:
We have a cost of living budget of R62,000 / $3875 / £2980 per month
FIRE best practice says that if you can live on 4% annually of your total net worth, then there's a very high chance your money will never run out.
The net worth we require to live off 4% would be R18.6m / $1.2m / £0.9m (if you need to know how to get to that number it is 300 times your monthly spending or 25 times your annual spending.)
We currently have R14.8m / $0.93m / £0.71m
We have a shortfall of R3.8m / $240k / £180k
Now, I'm a great believer in the "Shoot for the stars and you might hit the moon" approach to targets and I also subscribe to the concept of "If you're personal goals don't make you feel uncomfortable, then they're not stretching enough". I suspect 80% of that comes from the corporate brainwashing that I was subjected to for the last 25 years but as a concept they feel quite appropriate for me to try and generate almost a quarter of a million dollars of net income in the next 12 months.
I'm not going to lie, that feels like a little bit of a pipe dream as I sit here on the 9th January 2021 with little or no plan and no significant income opportunities on the horizon.
But imagine for a minute I even get close, even if I do more than half of that, that would be a thing, no?
I do have one foot in the door so to speak, I spent the whole of 2020 locked down learning about myself, our finances and every facet of of our investments, fees, performance and risk and whilst I still have some more to do, our investments are in the best shape they've ever been. If they were a dog, they would be a whippet or greyhound, they're in the trap, the hare is running and they are primed and ready to rip that stuffed animals head clean off (Possibly getting a bit carried away now).
So whilst there is still a few donkeys in the pack that need my attention, I don't foresee wholesale change for our investments in 2021. I also predict some tail winds that will make 2021 a winning year:
It doesn't feel like it right now, but the COVID-19 epidemic will end in 2021 in my opinion. Vaccines are rolling out like billy-oh in the developed world and its those markets I'm invested in, people will get back to work and business will be leaner, more galvanised and hungry to heal from the last 12 months, they will be better than before and that means higher profits which means higher returns for investors
I'm not going to give an opinion on the goings on in the US political arena in 2020 other than to say it's been a dog show for the country and it looks like we're a few weeks away from the dawning of a hopefully new era of normality for the country. As I'm heavily invested there, that should hopefully bring some focus on recovery and a return to global trade.
The UK finally has Brexit done and I am officially no longer a European. I'm not going to give an opinion on that either but the UK has largely been uninvestable for the last few year because of it and I am unfortunately also heavily invested there too, so an economic recovery story in the UK will also benefit us greatly.
South Africa is also in political turmoil and, in my opinion, is on the brink of a humanitarian or economic meltdown. Who knows what will happen but I do know that change has to come for the country we've made our home and whilst I doubt it will be beneficial to any South African citizen on the short term, change in whatever form is needed and that can only be good for the country in the long term.
So, if you're anything like me, the above is the bread and now you want to get to the filling of this sandwich, what does the portfolio look like for 2021 and what is the strategy. Well let's get on with it then shall we?
The Current Portfolio
I put tons of time, effort and research into coming up with our portfolio and its designed to provide a target of 12% annual returns and a minimum of 9.5% (which happens to be my long term target number) with relatively low risk and a 5 to 10 year horizon (which coincidentally when I hit 55 and can access my retirement savings) . I'm 45 next month so we have a realistic investment window of around 30 years in total with 10 years being the point that we move from "pre retirement" (Defined as retired but still capable of working and side-hustling if we need to) into Post-Retirement (where we won't be generating any more income and will be drawing down directly from our savings). To simplify that, I look at the rest of our lives in 3 stages:
Pre-Retirement - 2021 - 2031 (45 to 55 years old) - Retired but still capable of earning - Moderate Spending - Moderate income
Post-Retirement - 2031 - 2051 (55 to 75 years old) - Retired and active e.g. travelling & partying! - High Spending - Investment income only
The Golden Years -2051 to 2076 (75 to 100 years old) - Settling down, retirement village, bridge club and bowls, G&T in the garden in the afternoon. - Low Spending - Pension income only
So, to the portfolio:
And there she is, isn't she pretty?
Sorry it's a bit small, if you're struggling, you can download the image and zoom in. It might look like a lot because it is, its 43 individual investments in total. However, I wanted to show you everything as that is what I would want to know. However, they broadly fit into 5 categories and percentages:
SA Equities - 12%
Global Equities - 56%
Structured Products 15%
Bonds & Cash - 4%
Alternative & Social Investments 13%
And then the split between retirement and non-retirement investments is
Retirement - 55%
Non-retirement - 45%
I've sorted the list from best returns to lowest but don't read so much into that, there's been so much change over the last year that they're quite misleading. What is important is that the annualised total is currently 8.8% which is short of my 9.5% target.
I am completely confident that I will smash 9.5% this year because I've cleaned out almost all high fee, low return investments with the exception of my structured products which are a bit of a burden but provide 7-9% steady returns. The cost of cancelling them is too high so they'll all expire over the nxt 2 to 4 years and get replaced by low cost index funds that tend to yield nearer 12%.
The plan is cunningly simple, do as little as possible. I have a few necessary tasks but with 56% in global low cost index funds and just 4% in cash, we're in good shape. The alternative & social investments like Cattle and Solar Panels will grow as I reduce my exposure to structured products.
So the strategy in a few bullet points is:
Reinvest all investment profits and try to live off side-hustle income and Mrs H's salary
Offset as much tax as possible by investing in retirement annuities, Tax free savings accounts and renewable energy (under section 12b you can recover your costs for renewable energy equipment through tax in South Africa).
Continue to direct equity investments toward low cost global index funds
Don't make change for changes sake, try to avoid dealing costs and transaction fees
And that's it.
So if the target growth this year is R3.8m / $240k / £180k, I need just over a 25% return on investment. Even after all the analytics I had to do to get this post done, that feels seriously punchy. It doesn't feel impossible though and who knows what opportunity might come knocking. As i've said, I'm not going to count it as failure if I don't make it. in fact, if the return is more than 9.5% I'll call it a good year, but the reality of achieving the full 25% is potentially game changing for Mrs H and I and I like changing the game!
If I take the top half of my investments and look at their annualised performance, they average 22% return and whilst the overall annual return was 8.8% they're currently annualising at 12% so all I need to do is do twice as well in 2021 than I did last year. If my hypothesis is right that 2021 is going to be a lot better than 2020 then it wouldn't be too much of a stretch to believe that 12% could come up to 18%. Then I only need to focus on the 7% gap.
That might all sound like crooked logic to you but it's a hypothesis that I'm going with and the work on that 7% starts immediately.
I'd love to hear your thoughts on my thoughts, my portfolio, the strategy and simply if you believe I'm bonkers in the comments below. All feedback greatly received, good bad or indifferent.
I try to respond to all comments in a timely fashion so if you have a question or I'm using some jargon you don't understand or I haven't covered something you would hope I would, ask away, happy to provide an opinion.
Hope this has been useful, until next time