Tuesday 3 December 2013

Janus Investing

For the record: yes, Janus was two-faced but he was the god of beginnings and transitions. His name gives us, appropriately, the Roman month-name that we know as January - the beginning of the year.

But let me concentrate on his job of looking in two directions at once - and the eye-strain that must induce...

The DIY Income Investor portfolio was humming along nicely this year, apart from a dodgy patch in June (when the portfolio dropped by 4.3% in value). But things cooled noticeably in November (meaning, rather disappointingly, no more than the 'ninth' month of the Romans). Although the fall in value was a fairly modest 1.2%, it felt worse. (In fact it felt like a market turn.)

But that is only part of the story: the portfolio yield is rapidly approaching 6%.

These two qualities: portfolio value and portfolio yield make up the Perennial Dilemma for the DIY Income Investor. A dilemma because an increase in both is 'good' (in the sense of being desirable): I look specifically for high-yield securities to invest in because I like the income and I suspect that - more often than not - the value will increase. I am inordinately pleased if my portfolio value increases but then its average yield drops; the converse is also unfortunately true. Either way, this causes unnecessary stress.

However, both these values (value and yield) are obviously working against each other: an increased price (value) implies a decrease in yield! If you don't immediately follow that sentence, consider something with a price (value) of 100 and an annual income of 10: the yield is 10%. However, if the price (value) increases to 200, the yield falls to 5%. This is not very profound, just maths.

Whilst this is all very exciting, we should remember that - in this example - the income stays exactly the same. Here is, perhaps, the key to solving the dilemma.

As it turns out, the income of the DIY Income Investor portfolio increased in November. This rise is mainly due to an ISA top-up, it should be noted - but the main point I want to make is that the level of income of the portfolio is remarkably stable, allowing for the wobbles that are caused by selling and buying.

So, in the twists and turns of the financial markets, with the rising and ebbing of the financial tide, it is well to focus on what is important: the income that you are able to generate as a result of your - hopefully - wise investment decisions. The rest is noise.

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 comment:

  1. AH! That's what I hear when I turn on the computer. Noise from my portfolio... Depends on what decade of life you're in, surely, whether you choose to listen to the noise or not. If you are looking solely at your income for years and years, you can ignore it. If you are approaching the time when you or someone who succeeds you might have to sell your holdings, you have to listen and filter the noise a bit to look for sell signals, I think.