Tuesday 7 October 2014

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?

The financial world is slowly changing. It is not so much a seismic change but more akin to the slow progress of continental drift. At the heart of this change is the actions of Central Banks in the UK and US - not yet the Eurozone - in reaction to the steady improvement in their respective national economies. Make no mistake, the expectation of coming increases in base interest rates fundamentally changes the investment climate and the big institutional investors are still adjusting their holdings.

This change in financial climate I impacts particularly on fixed-income investments because it potentially reduces the relative attractiveness of their current yields. Consequently, in anticipation of a fall in the price of these holdings, I have been liquidating those securities that are showing a reasonable capital gain. In this context I am not keeping to my normal 'sell' rule and I am selling at capital gains that are less than the 'usual' five-times annual income.

The latest portfolio sale based on this theme is a chunk of my holding of Barclays 7.125% Perpetual Subordinated Corporate Bond (LSE:EB20). I have held EB20 off and on for a long time. The capital gain on the sale of this chunk was only 18% and the yield is still over 6% - so this was obviously not an obvious decision. However, it looks to me like the price has now started its secular fall, so I am grabbing this (meagre) profit.

Nevertheless, I am still holding some EB20. Why? Because I paid about the 'right' price for it - just above par. Even through the price may now fall further, I still need a fixed-income component to help smooth out the inevitable gyrations of the other dividend-oriented part of the portfolio. If the portfolio were a cruise ship, the fixed-income part would be the stabilisers.

Fixed-income securities and ETFs now account for only one-third of the portfolio. The stabilisers are 'on' but I probably need more.


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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