Monday 24 September 2012

The Making of a DIY Income Investor

As is pretty obvious, I advocate an investment style that is addressed primarily at generating income rather than ('overnight'?) capital gain. What is more, I strive to Do It Myself.

So what has led me to adopt this particular approach? How did I come to inhabit this particular niche in the private investor biosphere?
Do you remember your first savings account? Mine was a Post Office savings account, with a little passbook. It actually paid a ridiculous rate of interest - something like half a percent per year - but that was before I discovered yield. It was a kind of thoughtless financial discipline that provided a record of minor transactions, but little more.

And your first investment? A few years later, with a little money in my pocket, I managed to buy (by post!) some units in a fund. Why that particular one I don’t remember - there were hundreds on offer and it was a random choice - but the snow-capped mountain that figured in the publicity seemed to suggest solidity and deep geological processes at work. That was before I discovered fees and the Total Expense Ratio. Unsurprisingly, it lost money: for me, that is - not for them.

As I grew older and wiser I learnt how to buy shares by myself, although at this stage via the expensive assistance of my high-street bank, collecting an odd assortment of share certificates. This was something still tangible, like my old post office savings passbook. I even worked out how to transfer these certificates to my wife's name (to reduce tax liability) - a question of getting the right form, filling it in and posting it off with the certificate.

There was no great method to identifying which shares to buy, although I did focus on the London Stock Market. Magazine tips seemed to end up losing value. Little by little it dawned on me that no-one really knew what was going to happen in the Stock Market: welcome to the world of DIY investment.

But I still did not have a coherent investment strategy but I became more aware that I needed a strategy that limited risk and avoided paying tax, if possible.

Then I had a windfall from the shares of my employer, when the company floated. For the first time in my life, I used all of my Capital Gains Tax allowance and sold - year after year. In retrospect the limitation of the CGT allowance was the best thing that happened to me - otherwise I would have sold the lot all at once. With the profits I diversified my share holdings, including my first experiments with fixed-income investments like corporate bonds.

Then several developments seemed to come together: tax-protected ISA accounts were introduced (I had not taken out the previous PEPs) and the costs of internet-based brokers fell substantially. Self-Invested Personal Pensions became available for ordinary investors. Off went the paper share certificates and my investments became electronic - and tax-free.

So what do you do when your focus changes from trying to make money on the stock market to trying to protect the gains that you have made? This was when my eyes were opened and I started investing primarily for yield: high-yield dividend shares, corporate bonds, preference shares and so on. And diversifying; trying to hold on to what I had gained and aiming to grow the income, cautiously, myself - a DIY Income Investor.

(A version of this article appeared previously on Citywire Money.)

I am not a financial advisor 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.

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