Thursday, 11 September 2014

Whim versus Reason? (Portfolio Sale)

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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.

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