Thursday, 2 January 2014

Portfolio up 20% in 2013

The end of the year is traditionally a time to look back over the past 12 months - and to plan for the year to come.

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.

The Portfolio 

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?

To recall, the DIY Income Investor portfolio is made up of high-yield securities, split more-or-less equally between dividend shares and fixed-income. Most of these are held as individual securities but over the year the proportion of these types of securities held in Exchange Traded Funds has been increased to around 30% - hopefully reducing specific security risks (because of the inherent diversification) but also reducing the potential yields. The focus of the portfolio is still the London Stock Exchange - but the ETFs have been introducing some geographic and currency diversification.

The Benchmarks

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 shares:

UK dividend shares:

UK fixed-income:

And how are the international benchmarks doing? My international ETFs have performed as followed over the year:

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.


  1. Another great post.

    I am looking to try and get some exposure to the US market, and failed to find a good way to do this directly (would want to use Dividend Re-Investment Programmes), have you thought about this route at all?

    I have looked at ETF's, but the yield seems to be relatively low even on the SPDR Dividend Champions one.


    Financial Independence UK

  2. Hi Sisyphus,

    I wanted to bring Intu properties to your attention.

    The REIT has a NAV of 392 Pence.

    It is currently trading at 308 Pence.

    The yield is around 5%.

    Over the last three years, they have paid 15 Pence a year.



    1. Looks a good investment especially considering the continued growth within the UK market. Shall consider adding this to the portfolio, Thanks for the tip V.


  3. Hi Financial Independence,
    I buy USA stocks directly. Coke, Proctor Gamble, JNJ, PEP, Colgate, McDonalds, GE etc I'm trying to build a portfolio of 25 USA dividend stocks. USA companies pay dividends quarterly. I use the Dividend Champions list, these are USA companies which have 25 years + of dividend increases. I use a USA based Charles Schwab account.

    1. Hi Anonymous
      Did you have any trouble setting up your account, and do they allow DRIP's?

      What you seem to be doing is what I want to try and do also.


    2. Hi Financial Independence,
      No problem setting up Schwab USA account, you need to go via UK office and will need ID etc
      They allow individual share DRIPs. Make sure to complete W-8EN form so you only pay 15% tax on dividends. Schwab is one of biggest USA brokers, great website and service. Also SEC covers your investments to $500k. No stamp duty on USA shares and dividend compound more quickly because they are paid every quarter.

  4. HI DIY,

    Can you disclose how much your funds and total capital is ? I'm trying to generate £2K per month via dividend shares and ETFs (no fixed income yet, waiting for rates to increase). Are you retired and living off your income ? Do you have any rental properties ? Just curious to know your overall strategy to generate enough passive income to make work optional.


    1. £2k a month of passive income was actually my target when I was still working - that now supplements a pension which I have just started taking. With a yield of 5%, say, you would need £2k x 12 x 20 = £480k, which is a lot of money :-) ,So you need to get your saving skills perfected. Investing in rental properties has always seemed like hard work to me - but it works for some people. Much easier to buy some REITs, as Vatsa suggests above.

    2. Unfortunately, you'll probably need considerably more if invested in a SIPP as there'll also be income tax to pay. For the mere mortals among us, I'd also suggest being more prudent on the yield too, targetting between 3%-4%, unless you're happy to run down your fund.

    3. TV

      Mainly in ISAs - I've used SIPPs for wife & kids - precisely for the reason you highlight: income tax.

      Not sure what you mean about the yield - this is a high-yield portfolio after all! As for running down the fund, it depends how much you take out - there, I'd agree with you 3-4% annually max.

    4. My reference to yield was regarding the amount to withdraw in income from the pension fund, and not related to the yield on the underlying investments.

  5. Hi DIY
    have you put any thought into how you're going to draw the income out of your SIPPs when retirement is reached?

    1. Probably a simple annuity, as the total funds will not be huge.

  6. Be sure to check out drawdowns - they'll leave you more in control.

  7. Hi DIYII man,

    May I ask which platform you use to buy/sell (I have iWeb stuck in my mind probably from another post of yours). I am currently looking at the fees I pay on HL and comparing this with other platforms. I am a fairly passive investor (maybe a dozen trades a year) but might be looking at increasing this. Thx.

    1. Hi anon

      If you look at the Portfolio page, it gives all the details.

  8. don't know how I missed that. Thank you!