Wednesday, 20 November 2013

A Preference for Diversification (Portfolio Buy)

I told you...
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Warren Buffett famously said (on the subject of portfolio diversification) that - and I paraphrase the words of the master - you should be very discriminating about which companies you buy shares in and consequently (because you don't buy much) you should: 'put your all your eggs in one basket but watch that basket carefully'. (Andrew Carnegie said something similar a generation before.)

If you are a part-time DIY Income Investor - like me - you probably do not have time to watch the market carefully for any signs that your investments eggs may be going bad. So, like most amateur investors, I diversify and take my chances. That means not buying too much of a good thing: or in other words, denying myself more of what looks like the 'best'.

My first call when I have spare cash to invest in the DIY Income Investor portfolio is to top up any attractive existing holdings. (By 'attractive' I mean likely to produce sustainable high yield coupled with potential capital gain.)

However, I just don't feel safe putting more than 5% of the portfolio into any single security. If I ever get tempted, I only have to look at my 'legacy' holding of RBS to drive the lesson home: bought at a time when the yield was market-leading - and banks don't go bust, do they?

So once you have filled up your quota of what seem to be the best options, it is time to look for something else, although it may not look quite as good. For better or worse, my strategy is to maintain a balance between dividend shares and fixed-income securities - and I'm a bit low in the latter. Preferably I would like to buy a diversified, international ETF but I can't find one (with the exception of those I already hold), so the next best thing is a single UK-based security, preferably one with an international flavour.

The one that popped out of an addmittedly fairly cursory review of the market (thanks to Fixedincomeinvestments, my usual first port-of-call) was the RSA Group 7 3/8% Cumulative Preference Share (RSAB).

Now, there are some counter-indications to this purchase:
  • buying any fixed-income investment at the moment may bring income but will almost certainly lead to a capital loss in the short to medium term, as QE unwinds
  • the RSA Group is having a rather torrid time at present, including profit warnings and and apparently dodgy Irish management team
  • they cut the dividend earlier in the year - putting them on my Xmas 'naughty' list

Although there is no indication that this is the start of Armageddon for the RSA Group, at least the cumulative nature of the preference share is a reassurance that if times get temporarily bad - and the dividend is suspended - I should get paid my income sooner or later.

But. as I described earlier, my options seem to be fairly limited at the moment. Still, with a yield of just under 7% it's not too bad - as a second-best choice.

Now, where did  I put that basket?

[Purchase price: £1.086]


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.

2 comments:

  1. First I would say, glad to see a bond here. It took me decades before I fell through the gateway from equities into the parallel universe of fixed income - a universe that is many times larger and with infinite variation.

    I recommend a look at general accident. GACA and Ecclesiastical ELLA - both also insurance companies at similar yields but possibly less risky.

    May I suggest a look at the Co-Op CPBA/CPBB/CPBC - terms have now been announced, yield is good, two of those are guaranteed by the Group not the Bank. Only a few days before they crystallise though

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  2. These do look a little more interesting now the dividend is approaching 7%. Did you mange to unearth the original prospectus for RSAB, and if so can you point us to where it is available.

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