Tuesday 27 May 2014

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.

OK, we are being assured that any increase in the UK bank base rate will be slow and gradual - but the direction of travel is now clear: returns on cash will increase, thereby reducing the attractiveness of the returns from investments with fixed yields.  One indicator is the Ratesetter (my favourite peer-to-peer lender) current rate for people willing to lend over 5 years: it has moved up to 6.2%. Not bad for almost risk-free lending.

My latest sale from the DIY Income Investor portfolio is Aviva's 8 3/4% Cumulative Irredeemable Preference Share (AV.A). I bought this in 2012 (just over two years ago) at 114p and it has built up a juicy 22% capital gain. It's been a nice little earner but - as I said in the introduction - I am just not sure that the price will remain so buoyant. (I sold my ordinary shares in Aviva earlier this year - only just recovering what I paid for them.)

I don't think anyone really knows what to do for the best in the current market - and I am faced with an increasing cash pile to reinvest. I'm actually looking forward to the time when the peer-to-peer lenders like Ratesetter will be eligible for ISAs and SIPPs, so that I can park some cash with them. But this may still be some time away, given how slowly the wheels of government regulation turn.

[Sale price £1.4025]

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. I hold about 35% fixed income and I'm disposing of ,,,, none of it.

    My thinking is this: For interest rates to rise to the point where I was not getting a good return, the wider economy would be in general boom. Can't see this happening for many years. In the UK, house prices never collapsed and so the input to the economy represented by peoples disposable income is *very* sensitive to rate rises. I reckon it will raise to 2% - then stop, and that's after years.

    If I had been holding gilts I'd be on your wavelength - the rising interest tide will undermine the rationale for holding such tiny rates of interest. But anything that can stay comfortably above the water line, I will keep. I'd hang on to those Aviva myself.

    I hold a variety of fixed income, some bought after mention by yourself! - from the 5% tesco - currently trading at 5.5% premium, and pretty much a proxy for holding cash, to Nationwide CCDS and PIBS.

    Might be worth getting rid of the Tesco, if there was somewhere good to put it, but as it is, it's like a cash account paying 4.5%

    Yes, more on that question of, where are you going to put the money? Equities are, ahem fully valued, for most markets - particularly UK and US. Arguably EU stocks will rise if EU QE kicks in - but then again perhaps not. Where is the money going to go?

    If you want to stick it in peer to peer lending, go ahead. You actually can with a SIPP BTW, just not for the biggies. Look here for a remarkably comprehensive view of the UK P2P landscape : http://www.p2pmoney.co.uk/companies.htm

    I think your best rationale for selling would be anticipation of a market correction, perhaps triggered by some geopolitical event. That, you might be right about.