Riding the Rollercoaster (Portfolio Buy)

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Up and then down - the investment roller-coaster continues to both thrill and terrify participants. We are unfortunately living in 'interesting times' (to paraphrase the supposed 'Chinese curse' - which doesn't appear to actually exist).

Investing is a stressful activity because it brings into play our ancient Monkey Brain instincts to run (or fight) at the first sign of trouble.

So, what should we do now? Well, to paraphrase Jane Fonda - if it's not hurting, it's not working.

A Gamble on Recovery (Portfolio Buy)

Having generated some cash for my DIY Income Investor portfolio from a recent sale, I looked around for a good home for it. My first reaction is usually to look at the existing portfolio and see if anything looks attractive as a 'top-up'. By 'attractive' I mean 'high yield' (preferably as sustainable as possible) as well as holding some promise of capital gain over time.

This time I also did a little geopolical thinking. In other words, what is the most important factor currently in the world economy - and what are the implications?

DIY Recovery - and a Sale

'Recovery' in two senses - both a resurgence in the value of the DIY Income Investor portfolio as well as the digital retrieval of portfolio data from a failed laptop hard drive. In one sense the two are linked - without being able to recover the data, I wouldn't be able to easily recreate the portfolio's history.

But the current recovery trend of the portfolio means that I can discard the self-imposed 'ostrich' mode of the last month or so, to begin trading a little.

My SIPP Cup Runneth Over



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The gradual recovery in value of the DIY Income Investor portfolio continues - although more slowly than I might hope for. Apart from topping up a little, I have left the portfolio alone, hoping for a continued recovery in the markets.

Essentially, the principle is to leave it alone, rather than fiddling when depressed. However, sitting back and not doing a lot can sometimes lead to some interesting observations...

Topping Up (Portfolio Buy)

Despite keeping away from the depressing market news over the last weeks, I did have some cash sitting doing nothing in the DIY Income Investor portfolio - a situation which always feels a little incomplete to me.

My first choice for investment is to top up one my existing investments - on the basis that 30-or-so different securities constitutes more than enough diversification. And I'm not even sure that I know what is going on with all of them.

So, top-up it is - the key question is: what?

Flying on Autopilot

Since the start of September 2014 the DIY Income Investor portfolio has been hammered by the world-wide downturn in financial markets. The corner turned in mid-October, with the portfolio's market value recovering to values seen at the middle of the year: it is currently showing a 7% rise in total value for 2014, a far less stellar performance than in recent years.

Hopefully the markets will recover further over the coming weeks. But I have tried not to get too emotional about it all - mainly by leaving the portfolio on autopilot and removing our greatest obstacle to logical decisions: our emotional reaction.

Market Stabilisation? (Portfolio Sale)

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After a fairly horrible September for the DIY Income Investor portfolio (producing a 3.2% decline in value), October seems to be beginning as a month of stabilisation, which is a relief.

 

As usual, if the markets turn nasty, my usual reaction is to 'sit tight', leave the portfolio alone and spend more time on other things. Consequently there is little to report by way of action.

However, I have decided to sell something: can you guess what?

Safe as Houses? (Portfolio Buy)

A perennial problem for a DIY Income Investor is where to reinvest cash - be it straight income or the proceeds of a sale.

The search for a good home for your investment cash can take a while - and can cover the globe (if you're into the more exotic Exchange Traded Funds). But sometimes ideas for reinvestment come from closer to home: from the portfolio itself.

The Art of Waiting, Volcanoes and Scotland

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September has been a disappointing month so far, with a modestly downward trend in the DIY Income Investor portfolio. Consequently, there is little to do, other than to wait for something to happen.

While sitting and waiting, it is always tempting to speculate about what drives the markets but I suspect this is akin to trying to forecast when an Icelandic volcano is likely to erupt.

Whim versus Reason? (Portfolio Sale)

When is it right to follow a 'whim' - a 'spur of the moment' decision - and when should you exercise self-restraint?

I don't think there is an easy answer as our minds are quite mysterious in operation. Subconsciously we make decisions based on a whole range of built-in biases that pop into our conscious minds seemingly fully formed. On the other hand, the subterranean depths of our brains is constantly churning away at problems and sometimes a useful solution pops out.

So it is a dilemma: the decision that pops into your mind might be a poorly-thought-out psychological knee-jerk reaction or, then again, it may be a spark of a good idea.

In the DIY Income Investor approach I try to put a break on the most obvious behavioural biases that often hamper investors: for example, there are buying and selling 'rules' that curb the instinct to buy too quickly ("Ooh, it's shiny") - and sell too quickly ("Ooh, look how much money I've made").

Yet the latest 'sell' decision was quickly made. I bought the Manchester Building Society 8% PIBS (LSE:MBSR) just over a year ago, pointing out that it was potentially quite risky (yielding at that time 9%), given some recent horror stories with building society Permanent Interest-Bearing Shares. The Building Society has since stabilised, although it still remains a small, and therefore potentially vulnerable operation.

The stimulus to sell came from the realisation that the price of the PIBS had increased by nearly 25% (including interest earned) in a short 12 months. The second realisation was that the wider economic background in the UK continues to point to an increase in interest rates. And that means a fall in the price of all fixed-income securities, like PIBS.

Now, my normal 'sell' rule - developed to restrain the natural urge to grab a profit - is to wait until the capital gain exceeds fives times the current annual income. In this case the indicator needle barely reached 2.7 and the yield was still an attractive 7.3%. But my rational brain said: the wider situation is temporarily unusual. This was the rationale for other recent sales of fixed-income securities: the only way (for the price) is down. Probably.

So a whim is, this time, possibly a good idea. Taking together the interest and the capital gain, this has been quite a good year's work.

[Sale price: £1.077]
 

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.

Speculator or Investor? (Portfolio Buy)

If you call yourself an 'investor', this implies that you have a long-term perspective. By contrast, short-term dabbling in the stock market is usually labelled 'speculation'.

For whatever reason, the term 'speculation' usually comes with fairly negative connotations - and conjures up (at least for me) images of wide boys in suits with red braces. However, the objective is - one assumes - the same: to increase your overall net worth over time. It's just that the time-frame differs.

But, although I like to think of myself as an 'investor' - I have to face up to the fact that my investment style does incorporate an element of 'speculation': the bulk of the DIY Income Investor portfolio was bought in 2013 and 2014 - a speculator's time-frame.

Nothing Ventured...(Portfolio Buy)

Venture Capital Trusts (VCTs) are fairly exotic investment vehicles that offer tax incentives to invest in start-ups and unlisted companies, with the proviso that your money stays put for at least five years. However, VCTs have not interested me in the past, as - thanks to ISAs, SIPPs and tax allowances - I don't pay any tax on my investments and savings.

But what I didn't realise until recently is that you can also buy and sell shares in VCT companies - and some of these have really attractive yields.

Develop Your Spidey-Sense

My son has captured a huge spider in our bathroom and has adopted it as a pet (naming it Shelob). Although this behaviour is more than a little questionable, it did get me thinking...

Spiders have provided us with inspiration for thousands of years: there is something about their painstaking work building (and rebuilding) a web and their seeming unlimited patience waiting for a victim to get caught up in it. (Robert the Bruce is the most famous example). They lurk, unseen most of the time - that is until they are caught in the open, unexpectedly.

So, can spiders teach us anything about investing?

HALP Yourself with Horizontal Thinking

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You've no doubt heard of lateral thinking but I do some of my best (?) thinking horizontally, lying on my bed looking at my laptop. Not good for posture, I know - perhaps that's why my back hurts?

But back to horizontal thinking: it's not like sitting at a desk, with so many distractions but rather it is almost Zen-like, as I can look at the trees out of the window. Almost day-dreaming - but allowing the subconscious to surface.

So, what does horizontal thinking tell us about the price of bonds?

How Do You Buy Food?

It may seem off on a tangent - but I think the way you buy your weekly food shop may say a lot about your investment style. Buying things to feed yourself - to grow or maintain your body - is an essential life-skill; so, I would argue, is buying investments to grow or maintain your wealth.

Maybe thinking about one facet of your lifestyle might help the other? Many people would probably consider my own food purchasing style quite eccentric - but then maybe that goes hand-in-hand with investing style.

Digital Detox - and the 'ETF Effect'

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DIY investors of all flavours probably find it difficult not to check the latest prices of their investments - I know I have that problem. Most mornings I sit in bed, on my laptop, and wait for the London market to open - or more accurately, I wait for 30 minutes after the market opens, given the delay that is inherent with free-of-charge market data.

So, the annual holidays - being out of touch for weeks on end (this year, 12 days on a cruise around the British Isles) - is a bit of a challenge to this probably slightly compulsive behaviour. But being out of touch is like a digital detox - for a data junkie.

The 'Reverse Bubble' (Portfolio Sale)

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One of our human investing behavioural biases is the fear that a paper gain we have made on an investment will suddenly be snatched away. This bias leads us to sell winners 'too soon'. Of course, the difficulty is identifying 'too soon' - I haven't yet found anyone putting forward a coherent strategy for when to sell, other than 'not too soon'.

My own observation is that the high-yield securities I aim to buy tend to behave a little differently to the run-of-the-mill 'value' shares. Not all high-yield is 'value', of course - the skill lies in sorting out the fatally flawed from the temporarily disabled. A high yield opportunity often exists primarily because of a perception of risk that is subsequently proved to be overly pessimistic. In other words, it is like a 'reverse bubble': once it pops, the price returns to 'normal' levels.

On Doubling Up (Portfolio Buy)



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The dividend shares I buy. as well as being 'high yield' are usually 'value' shares, in the sense that their price compares favourably with their earnings and book value - and they don't have too much debt. The market will be worried about something else about the company - hence the high yield.

It may be hubris, but when one of my 'chosen ones' falls in value, and this is for no apparent good reason, I often consider 'doubling up' - buying more on the price drop in the hope that the price will quickly rise again. This is obviously putting myself at odds with Mr Market (but then that's what I do a lot) - but it seems to work, more often than not.

So, when should you think about doubling up?

More ETFs (Portfolio Buys)

With an average yield of (now) 6%, the DIY Income Investor portfolio is throwing off cash at a satisfying rate. Add to this the sale of both profitable and unprofitable investments and the portfolio hit a substantial cash glut over the last few weeks.

I don't like holding cash in an investment account, as it just sits there, lazing around figuratively watching the Footie or Wimbledon, rather than earning its keep, like it's supposed to. Personally, I can't wait until I can access Ratesetter's peer-to-peer lending rates from inside an ISA (now the New ISA or NISA) or SIPP.

Until then I need to keep looking for better uses for the cash - and the long-term strategy says 'buy ETFs when the yields are attractive'.

London's Juicy Bond ETFs

It's all about the juice...
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I'm always on the hunt for interesting Exchange Traded Funds (ETFs). Not just any, of course, but specifically high-yield and preferably geographically diversified. What is slightly surprising to me (given the wealth of data available) is that these are not so easy to find - there does not seem to be a comprehensive list that is ranked by yield.

I recently looked at high-yield dividend ETFs. Today I'm specifically looking for fixed-income ETFs quoted on the London Stock Exchange. So here goes with some more real-life Do It Yourself investing...

Update on the ETF Strategy (Portfolio Buy)

Regular readers may be aware that I am trying to increase the proportion of Exchange Traded Fund (ETF) holdings in the DIY Income Investor portfolio. With recent sales and this latest purchase (see below), they account for 30% of the portfolio - but I'd like to buy more.

So why am I a fan - and why am I buying some and selling others?

The New Sell Rule (Portfolio Sale)

In the new 2014/15 financial year I started implementing a new 'sell' rule, to deal with the unpleasant - but necessary - task of getting rid of poorly performing investments. At the time this helped me to rationalise a clean-up of the portfolio, getting rid of long-term losing 'trees' that would provide a better overall view of the investment 'wood' (so to say).

Having adopted the rule, when it flashes 'sell', then I now feel much less reluctance to take the loss and move on.

The Old Crossroads

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I've just come back from my first visit to the small-but-perfectly-formed East Anglia Bluegrass Festival. During the weekend several bands performed a gospel song made famous by the late, great Bill Monroe - The Old Crossroads.

Although this music may not be your cup of tea, the chorus has a warning that has familiar ring for investors:

The old crossroads now is waiting
Which one are you going to take
One leads down to destruction
The other to the pearly gate

Renewable Energy (Portfolio Buy)

After getting a bit depressed about the options for good yields on offer for my current cash pile, a comment from a reader cheered me up - hopefully, in a good way.

I guess that most of us have become more aware of the environmental impacts of our activities. Despite trying to 'do the right thing' environmentally. I have always been a bit sceptical about alternative energy.

Until now, that is...

Selling the Crown Jewels? (Portfolio Sale)

Yields are falling all around as both dividend shares and fixed-interest prices are rising on the London Stock Exchange. Perhaps it's due to an influx of Euroland money, seeking a safe haven - who knows?

But it is providing a bit of a conundrum for this DIY Income Investor.  The latest portfolio sale is almost shocking - kicking out the poster boy for the portfolio as a whole. It shows how difficult things are to judge right now.

Consols 4%

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In the world of yield-oriented income investing, you have to accept that the goalposts are always moving. Mr Market is continually changing his mind, lurching between euphoria and despair, swept along by a never-ending stream of news, both trivial and significant.

In all this churning activity, for the UK-based DIY Income Investor one important reference point is the undated UK Government Consolidated Loan Stock, with a fixed coupon of 4% - affectionately referred to as 'Consols 4%' (LSE:CN4).

Put the Dog Out! (Portfolio Sale)

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Better late than never, I suppose.

After a thorough clear-out of my DIY Income Investor portfolio dogs (poor performers) earlier this year there was only one pooch left. But, much as I have grown attached to him, he had to go.

Under and Out (Portfolio Sale)

Sometimes low is good. Low cost, low fat - that sort of thing. And limbo dancing, of course.

But when the yield on one of your investments gets too low - that's another matter. Particularly if the reason is that the price has risen.

A low current yield means - if you are a DIY Income Investor - that your money is not working hard, but is figuratively messing about on the beach. Time for action.

Hall of Mirrors (Portfolio Buy)

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A regular feature at fun-fairs used to be the Hall of Mirrors, where you could enjoy distorted images of yourself: thin becoming fat, tall becoming short - an alternative image of reality.

Regular readers will be aware that the key metric for the DIY Income Investor portfolio is yield, with the proviso that this yield should be as sustainable as possible. Essentially I am buying high-yield securities and selling them when they become low-yield, preferably when this is due to a substantial price rise.

However, when buying something that is not priced in your 'home' currency, there is an additional factor to consider - the trend of the exchange rate. Otherwise you risk being misled by a distorted image of yield.

Grabbing Profits... (Portfolio Sale)

As readers will be aware from my last post, I am fearful for my fixed-income capital gains - so I am selling off those with any substantial profits. The paradox is that these prices continue to increase, when I expect them to be decreasing.

However, by 'running for the hills' I am breaching my normal 'sell' rule which is intended to encourage me not to 'grab profits' - but wait until capital gains exceed five times the current income. But I think the situation is sufficiently abnormal to exercise some discretion here.

Bonds Away! (Portfolio Sale)

Here's the thing (as they say in those American films): why have the prices of many UK fixed-income securities continued to increase recently?

 

To recall the basics truisms: the yields on all securities are related, with yields on low-risk government bonds setting the baseline; interest rates on cash deposits also influence yields in the market; the 'value' of fixed-return yield is also undermined by the level of inflation.

 

So, looking into the crystal ball, what is likely to happen to a) interest rates and b) government bond prices and c) inflation?

Back to the Future (Portfolio Buy)

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One of the nice things about being a DIY Income Investor is that the 'cash bucket' quickly fills up giving the opportunity to invest in something new. This process means that the portfolio is gradually refreshed and that its constitution can be modified over time (in terms of the balance between dividend shares and fixed-income securities). Added to this, the annual ISA and SIPP contributions give a useful fillip to cash levels, meaning that even more renewal is possible.

Except sometimes, you might go back to an old favourite - something that you have sold off in the past. Deja vu, all over again.

Catch a Falling Star... (Portfolio Buy)

Errr...don't try this at home!
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"...And put it in your pocket" - that's Perry Como's advice.

But when it's a falling knife, should you try to catch it? Well, I've been trying a bit knife juggling - what has this produced?

Spring Cleaning: The Trilogy (Portfolio Sales)

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After the original Spring Cleaning and the follow-up, Spring Cleaning Part Deux, the DIY Income Investor portfolio started to look more like a more effectively managed operation. Removing the bulk of 'legacy' losses dating from the time of the financial crisis in 2007/08 has refreshed the 'feel' of the portfolio - and by a quirk the overall net profit/loss position was reset to zero.

Although it seemed like a big step at the time - taking long-standing losses on the chin - it did not, in fact, change anything much. Since those 'spring cleaning' sales, the portfolio has hit new all-time highs in terms of both capital value and level of income generated. The net profit/loss in the few days since the sales is currently over 3% - although this clearly has little to do with the sales, which made up a small proportion of the total.

But it was not yet time to put away the yellow rubber gloves...

It Was The Best of Times...(Portfolio Sale)

Another one for the chop...
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...it was the worst of times. (Dickens - A Tale of Two Cities).

Sometimes we end up doing the right thing for the wrong reason - and sometimes we do the wrong thing for the right reason.

When it works you need to acknowledge that you have been lucky; when it doesn't - just put it down to experience and try to learn from it.

The Tao of Income Investing (Portfolio Buy)

A different perspective
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The concept of 'Tao' (or 'Dao', as it is more commonly represented nowadays) is metaphysical: it is roughly translatable as 'way' or 'path' and hence, the method or doctrine one adopts to achieve something. Tao can be roughly thought of as the flow of the universe, or as some essence or pattern behind the natural world that keeps the universe balanced and ordered.

What I want to explore here is not so much the deeper meaning of life (and how it should be lived) but rather the concept of investing as part of a difficult life journey. There is no easy route - and each of us must find our own approach.

Spring Cleaning, Part Deux (Portfolio Sale)

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If you missed Part One - I am doing some major tidying-up on the DIY Income Investor portfolio by clearing out some investment 'dead wood'.

But the funny thing is: it's only 'major' in my head - the sales don't change anything in the portfolio, they just accept the paper losses incurred by bad decisions in the past.

Spring Cleaning (Portfolio Sale)

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It's that time of year: the sun is shining, the daffodils are flowering and we feel that, finally, the winter is over. Coming out of the dark, cold (and wet!) months gives us renewed energy to tackle those jobs that we have, perhaps, put off for too long.

Like cleaning up the dead undergrowth of the DIY Income Investor portfolio.

New Year's Resolution! (Portfolio Buy)

A new Financial Year - a good time to make new resolutions to improve my investing style. But this is one that is a bit different - it's a new purchase, in fact. Actually, it's a re-purchase of an old favourite that has come back onto the high-yield radar.

Anchors Aweigh!

Gene: You gotta deal with those anchors!
Frank: Yeah...
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In the swirling blizzard of numbers that is the stock market it is often difficult to know which numbers are important.
Our ancient monkey brains deal with this by grabbing something that is thought to be known - and extrapolating from there: a bias called 'anchoring'. The problem is that there is often little connection between 'what we think we know' and the rapidly changing real world.

It's All About the Yield (Portfolio Sale)

The DIY Income Investor portfolio is based - for better or worse - on yield; the ratio of the historic and forecast annual income that the security will produce relative to the purchase price. The underlying assumption is that higher yields indicate that the Market is wary of the securities for some reason: they are out-of-favour and potentially high risk.

Usually these companies survive, the Market upgrades their future potential and the value of the holding increases. Sometime the recovery does not happen and the holding joins the 'dog' pen.

Release the Dogs! (Portfolio Sale)

I'm sure he'll be OK out there...
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On an otherwise drab market morning one little ray of sunshine: one of my 'dogs' staggers to its legs and shows some sign of life.

Who am I to stop you - off you go, back to that big dog pound that is the LSE.

Buying a puppy is not just for Christmas! You're telling me. For nearly four years I've been giving this sad canine a home - but now it's time to show it the door.

2013/14 Performance - Review of Benchmarks

Times change - and so do markets. What worked as an investment strategy last year may not be so effective in the coming year.

One way of keeping up with the evolution of financial markets is to look at the pattern of benchmark performance. However, driving by looking at your rear-view mirror is not a recipe for success...

20% Gain = Happy Disposition?

The results are in: the total return on the DIY Income Investor portfolio for the 'financial' year 2013/14 (I measure it as 1 April 2013/1 April 2014) is a sliver under one-fifth (19.5% to be precise). Not too shabby - but less than the near-30% in the previous year.

Still, it seems that I could have done better...

In The Saddle Again (Portfolio Buy)

From the horse's mouth
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As I have said several times before, to me the stock market is a lot like one of those slightly ramshackle funfair carousel rides: loud and colourful, with gold leaf decorated horses riding up and down on their poles, going round and round (yet getting nowhere). I like to think that I can ride one horse to the top and then jump off and cleverly hop onto another one that is just taking off. And what is more, I dream I can make a living from it!

The reality does not always fit the dream, of course - sometimes you fall off and sometimes the horse spins off, out of control. Sometimes the horse you think should be going up decides to stay put.

But the other similarity with the fairground ride is that the same horse comes around and around - and sometimes you get to ride it more than once...

How To Fool Yourself

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We are all a bundle of hundreds of hard-wired behavioural patterns that have successfully kept our genes alive since Adam underwent a bit of surgery. This means that our monkey brain decides to do many things without us really thinking about them: at best we rationalise an ex-post semi-logical explanation. I talk from experience.

Because we are generally unaware of there behavioural responses (or 'bias' to give them their more formal name), they are very powerful - and can be used against us quite successfully (think of any breed of salesman). At the very best, we can hope to recognise the patterns and adopt some kind of strategy to minimise their influence - because it's not like you can turn them off.

Family Planning

Regular readers may be aware that I have developed a new comprehensive approach designed to deal with eventual inheritance issues. This is not my favourite subject, as it deals with something that I won't be around to enjoy, but is a necessary part of modern family financial planning.

One element of this was investing in SIPPs for my kids. Here's an update...

Exit Aviva (Portfolio Sale)

What are you waiting for?
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One of our key monkey-brain investing weaknesses is loss aversion: behavioural tests show that this bias consistently causes us to make poor financial decisions.

I am not immune from this bias and I continue to try to find a way to deal with it - a way that 'goes with the grain' of my mental make-up rather than using sheer logical willpower.

However, for now the DIY Income Investor approach is just to hold on to losers in the optimistic hope that they will eventually come good.

Sometimes this works...

Looking for Trouble in Emerging Markets (Portfolio Buy)

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For better or worse, the DIY Income Investor portfolio has a big bet on Emerging Markets.

However, 'Emerging Markets' is a real rag-bag of a label, including diverse states such as the BRIC and MINT countries as well as dozens of smaller administrations.

It's time for a review: is this reckless madness or inspired opportunism?