Having made the bold assertion that the aim of my ISA is to seek income, rather than the usual aim of seeking to increase my net worth, I then go and review 2010 in terms of net worth. Which is all nice, and party time as it so happens, but how did that income go?
It turns out to be incredibly hard to unscramble the egg and work out how that went. It’s probably easier if you are an accountant, but I’m not, so I had to do the best I can.
The issues are that I haven’t straightened out the targeting of my ISA properly, since at the moment it serves several masters in terms of my hopes and fears. The rationalists at The Accumulator and RIT would titter softly into their tea and mutter I told you so, and to some extent rightly so. To go anywhere you have to know where you’re going, and perhaps why.
However, it isn’t unreasonable for parts of one’s budget to get allocated to different things in real life. Not all your money goes on insurance, or hedonism, or rent, or tea and biscuits.
There’s a fair case to be made that where I screwed up was in not deciding in January 2010 how much ISA budget I was going to allocate to income seeking, how much to asset protection. However, being an opinionated SOB I say that Emerson was right,
A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do.
Okay, I’ll steady on in claiming to be a great soul. I’m not that arrogant a SOB, though I’m working on it… However, my belief system does not assume that Western economies are paragons of stability, and at times I will seek shelter from the storms in golden and silvery ports, at times surf out into calmer waters. In the background I am trying to build an income.
You are only allowed to contribute ~£10,000 a year into an ISA, and I don’t do non-tax-sheltered investing so I have to do most of my saving in pension AVCs. Once I retire I will spring the tax-free lump sum and probably shovel it into ISAs over a few years. Assuming, that is, that in five years there still are tax free lump sums, ISAs and a £ that is worth more than a grain of rice…
So I have classified my ISA components as ‘income’ and ‘other’, other being balanced in hope (= emerging markets and growth stocks) and fear (= gold and silver)
So taking the income section, I plot the money I have spent on achieving an income on the left-hand axis, and the income I have received from that on the right-hand axis, conveniently scaled at 1/20th of the LH axis. If the maroon bars were to reach the same level as the blue bars, over than year I would have achieved my 5% target (5%=1/20th). So I fell short this year, my dividend return on a stake of £5500 purchase cost is £208, thus a 3.8% return. However, if I take into account that I only really pumped up my stake in July, my average stake over the year was £3800, so my return on actual stake is 5%. It’s a bit rude to expect people pay me the dividends in January for what I was about to buy in July 🙂
UK RPI has rolled in at 5% this year. Not being a lying bastard politician I don’t do CPI so I have got my income, however, the value of my stake had better have improved by 5% otherwise I will slowly be destroyed. I guess this is where I can’t afford to ignore net worth. The capital value of these income-yielding investments has appreciated by 15%, so I take off the 5% RPI loss leaving me with a stake at 110% of its real cost to me. So far so good, I can eat another two years of 5% inflation and still come good, assuming the capital value of the stakes don’t fall in numerical terms.
I feel okay about this as a strategy though I fully expect to see much more than 5% inflation in the next five years, this is where I hope the theory that equities track inflation over the long run holds up, otherwise I am in trouble.
So there’s much handwaving to get the answer there, either qualifying an income-targeted approach analytically is hard or I have made a particular dog’s dinner of it.
The other conclusion is that I have spent £5500 to get an annual income equivalent to three weeks Jobseeker’s Allowance. Assuming I sharpen up my act and target 100% of future ISA contributions, in six years I will have spent £70,000 to get the same annual income as going on the dole 😉 This doesn’t surprise me – you need about 20-25 times the annual income as a stake, so if I want 52*£65=£3380 then it stands to reason I need a stake of at least £70,000. But now you know how much savings you need if you can’t face the smirking questions from the spotty youths behind the desks at the Labour Exchange inquiring “what efforts you’ve made to find yourself a job in the last two weeks, Sir?”
So I think the conclusion of all that was I fall into the ‘did OK’ part of the annual report, though probably with a ‘could do better’ in terms of not chasing other goals. Next year I will focus on this income targeted approach as I think I have enough evidence that it works in principle broadly in keeping with theory. I need a jolly good stock market crash so I can get to buy ITs or income yielding shares at a 5% yield rather than 4% or less. I can see why people focus on net worth to see how they’ve done over a year – it is so much easier.