Thursday, 1 January 2015

2014 - A Tough Year!

The quiet closing days of 2014 offer the chance, again, to take stock of how the DIY Income Investor portfolio has performed over the year - and to assess whether any change of direction is needed.

The numbers are now in (more or less) and overall, during 2014, I have managed to produce an increase in total portfolio value (i.e. total return, as all income is reinvested) of around 11.4%.

This doesn't feel particularly outstanding compared to the results in the past couple of years - but then again, how has everyone else done?

The year has been quite difficult - I hope you have had an easier time of it! Although most months produced positive growth, September was horrible for the portfolio - with an over-3% drop in value. December has also been negative but a continuing 'Santa rally' is helping to boost the value of the portfolio again.

To recall, the DIY Income Investor portfolio is made up of high-yield securities, split between dividend shares and fixed-income (currently split  - 65%/35%). Most of these are held as individual securities but over the year the proportion of these types of securities held in Exchange Traded Funds has been increased to around one-third of portfolio value - hopefully reducing specific security risks (because of the inherent diversification) but also reducing the potential yields. The focus of the portfolio is still the London Stock Exchange - but the ETFs have been introducing some geographic and currency diversification.

When looking at portfolio results, I like to start with cash returns. I use Ratesetter's 5-year return (peer-to-peer lending), which is around 6% (I have just lent a chunk of cash at 5.9%). This cash is not guaranteed by the Government, so there is a little risk premium implied in this return, as well as the 4-5 year term, but this gives me a kind of upper benchmark for cash. If I can't do better by investing I shouldn't bother.

But investing is far from being an exact science - and neither is assessing your performance. Financial markets swell and shrink on obscure tides of confidence that are, for the most part, unpredictable. Rather than looking at absolute returns, it is more reasonable to benchmark your results with the overall market (as most fund managers do) - although in fact this is a little misleading.

The DIY Income Investor portfolio is invested on the London Stock Market - so let's see how that has done over the year. The results (in terms of total return) for the various FTSE indices are not brilliant:the FTSE All Share index (arguable representative of 'the Market') is up only 1.2%; the blue chip FTSE 100 index is up only 0.7%. In fact, the best returns have been (as usual) with the smaller, riskier companies - the FTSE 250 index is up 3.7% and the FTSE Fledgling index (the newest, smallest quoted companies) is the best performer) at 8.8%. There is an obvious risk profile to these results.

So, the portfolio has done better than cash or the wider market. But a better comparison would be  with other similar types of portfolio. This is a little difficult, but not impossible, if we use ETFs as a proxy.

UK dividend shares seem to have done OK, generally:

The big surprise (to me, at least) is how well UK fixed-income has done:

Internationally for dividend shares, Asia Pacific and Emerging Markets have suffered but Euroland and Global dividend shares seem to have done well over the year:

Internationally, fixed-income securities seems not to have done as well as in the UK:

So, what does this quick overview of global returns tell us?

There seems to be one major feature: fixed-income securities in the UK did much better than I was expecting - perhaps I was hasty to sell off so much? UK inflation has been very slow to pick up, despite some economic recovery - this has delayed any need to raise interest rates. I'm guessing my timing was wrong, but that the fall in value in fixed-price securities will happen in 2015.

Secondly, Emerging Markets continue to be a problem area - I'll continue to hold these, though, if the yields remain attractive. In addition, a couple of recent purchases have not performed well, notably APF (although this is recovering rapidly). By contrast, I have made some good buys (e.g. CLIG).

Are there any clues to what might happen over the coming year? Can the current sagging oil price continue? And what does it really mean - Chinese slowdown or oil glut? Will Russia melt down? It's in no-one's interest but it may be inevitable, given the nationalistic politics of Russia. The so-called Islamic State and Ebola seems equally difficult to control and contain, although arguably neither has much impact on world financial markets. So, the overall picture is pretty unpredictable, as usual. I'm remaining optimistic and hoping for a general recovery in 2015 - but that's just me!

In a previous article, I noted that the SIPP portion of the portfolio has performed much better than the rest. I concluded that the reason was the higher proportion of ETFs, plus a couple of lucky one-off investments. So that has to be part of the formula for 2015. In fact, I think the strategy for 2015 will need to be very similar to 2014: following the yield signals, an emphasis on dividends (including some targeted individual securities), and an increase in ETF holdings with a reasonable yield.

Happy New Year!

Update 12/1/15: Canadian Couch Potato's passive portfolios have made 10-11% return in 2014. The US equity indices have done particularly well.

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. Fascinating, as ever. And although you have done about twice as well as I have, and obviously should not be selling up and sticking it all in Ratesetter, one has to say that if you were driven to do this presumably the Ratesetter investment could not join your ISA and you would have to pay tax - perish the thought.
    Happy New Year ....

    1. You are right about Ratesetter/tax, unless you have a non-tax-paying spouse, that is :-) But the good news is that they may well be allowed in ISAs/SIPPs before too long.

  2. Hi Sisyphus,

    Congratulations on your Portfolio performance.

    Correct me if I'm wrong, but doesn't the Ratesetter 3 and 5 year loans pay back both capital and interest on a monthly bases? Therefore to get the 6% AER on the 5 year loan, you would have to lend the money for 10 years, otherwise you are only getting 3% (Similar to a regular saver account).

    As always, thanks for a great and informative site, and all the best for 2015.

    1. They have a clever reinvestment app that you can set up to re-loan any money that appears (sometimes there are early repayments, as well). I tend to do this manually eadh month, as they send you a statement of your cash position. So, as long as you don't take the money out, you are getting the full whack of interest.

  3. Replies
    1. That's not bad either! I bet most of the fund managers will struggle to beat that.

  4. One thing to bear in mind is that its probably better to hold stocks outside SIPP and ISA due to the tax credit, while keeping Bonds inside the tax wrappers.

    Have you looked into VCT's as well? Tax free etc. Some good yields on the better ones.

    1. Hi Clubsport

      You are right that the tax advantage of ISAs/SIPPs in relation to dividends/capital gains can be limited (given the tax credit and annual allowance), the simplest approach is to whack all your investments into these tax-free wrappers - then you can forget about tax liabilities in 10 or 20 years, when your nest egg has grown nicely.

      I do have one high-yield VCT (which I hold for its yield, not its tax advantages) - but I view these as quite speculative.