The results are in now: the DIY Income Investor portfolio has had a total return of 20% in 2013. Not too shabby, although far from a stellar performance; coming on the heels of a more impressive 33% return in 2012. More interesting is how this compares with other 'income investing' benchmarks - or the general market for that matter.
With every 'buy' and 'sell' the portfolio is exposed for all to see, the point being that this imposes a harsh discipline on investment decisions. What worked - and what didn't? And should the strategy be modified for the coming months?
The appropriate benchmarks for total return (i.e. including income) might be those related to Exchange Traded Funds that specialise in these types of assets:
- UK FTSE 100: the iShares FTSE 100 (ISF) ETF is showing a 1 year return of around 19%
- UK FTSE 250: the iShares FTSE 250 (MDD) ETF - 1 year return of around 32% (for the second year running, the best performance of any related benchmark I could find!)
UK dividend shares:
- the iShares FTSE UK Dividend Plus (IUKD) - 1 year return of around 24%
- the SPDR S&P UK Dividend Aristocrats ETF - 1 year return of around 26%
- UK corporate bonds: the iShares Markit iBoxx £ Corporate Bond (SLXX) - 1 year return of only around 0.6%
- iShares Markit iBoxx £ Corporate Bond ex-Financials ETF (ISXF): a similarly low 1 year return of around 0.3%
- UK gilts: iShares FTSE UK All Stocks Gilt (IGLT) - 1 year return of around -4% (that's a minus!)
- International dividend shares:
- db x-trackers Stoxx Global Select Dividend 100 UCITS ETF (XGSD): trailing 12 month total return 12.6%
- iShares DJ Asia/Pacific Select Dividend 30 ETF (IAPD): 1 year return around 7%
- iShares EURO STOXX Select Dividend 30 ETF (IDVY): 1 year return around 19%
- SPDR S&P Emerging Markets Dividend ETF (EMDV): 1 year return around -1.4% (yes, another minus!)
- International fixed-income:
- SPDR Barclays Emerging Markets Local Bond UCITS ETF (EMDD): 1 year return around -3% (minus, again)
- iShares Markit iBoxx Euro High Yield Bond ETF (IHYG): 1 year return around 8%
For a US perspective, I have quoted The Capital Spectator before - here is his 2013 summary:
Analysis of Performance
What can we take away from this blizzard of numbers?
First, the pattern of the ETF benchmarks highlight the poor performance of fixed-income compared with dividend shares - all around the world, 2013 was not a good year to hold fixed-income securities. What is more, Emerging Markets have performed poorly - in fact the best returns seem to have been in developed market equities. In particular, the FTSE 250 has provided the best total return. (Congratulations if that is where you put your money!).
What is interesting, perhaps, is that although the portfolio contains 50% fixed-income, the overall performance has been similar to the overall return of the FTSE 100 - but obviously the return has been lower that a portfolio of only dividend shares.
The pattern discussed in my previous post on these US benchmarks has continued: US stocks (shares) have soared, followed by those of developed market economies. Junk bonds have just about held their own - but any other fixed-income has been a disappointment.
So, basically, the DIY Income Investor portfolio is just in line with western stock markets (although trailing that of the US) and the fixed-income portion - as well as the investments in Emerging Markets - have been a drag on performance. In other words, a simple FTSE 100 tracker would have done just as well.
Strategy for 2014
My guess is that the key factors affecting 2014 are likely to be the unwinding of QE, the recovery of the Eurozone and the recovery of Emerging Markets. I'm afraid that the US might bomb, after its recent stellar success.
Most experienced investors will stick with a strategy that they have thought through - but may allow a few tweaks around the edges. For me, the emphasis on high-yield remains, as does the split between dividend shares and fixed-income (times change, after all - and some years are going to be bad for both). Diversification is key, of course, with no single investment making up more than 5% of the portfolio.
Investment decisions for the DIY Income Investor portfolio are based on yield (plus trying not to actively lose money with overly risky investments). The highest current ETF yield in my portfolio is IHYG (iShares Euro High Yield Corporate Bond UCITS ETF) at 6.6%. That is closely followed by EMDV (SPDR S&P Emerging Markets Dividend UCITS ETF) at 6.1%. My guess is that both of these areas will do well.
In addition, I plan to continue to increase the range of ETFs that are held, as well as to increase the proportion of the portfolio held this way. (The longer term objective is to make the 'portfolio' - in fact a number of individual portfolios - easier to manage.)
Good luck for the coming year!
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.