Tuesday 3 February 2015

Breaking the Rules (Portfolio Sale)

As an investor (and if you are reading this, you probably are) - no matter what type of investor you are - you should have developed an investing strategy

But sometimes you might need to break the rules...

This strategy will include three main parts:
  • your basic concept of how the market works (for you particular investment style)
  • your investment 'architecture': the mechanics of buying, holding and selling securities, whilst minimising tax exposure
  • your 'rules' for buying and selling: because, fundamentally, we are all monkey-brains.
As regular readers will know, my DIY Income Investor basic investment concept is in two parts:
  • I want to hold assets that generate income (mainly because I want to be able to hold securities 'for as long as it takes' for them to recover. The income also provides a mechanism for 'refreshing' the portfolio)
  • markets over-react to bad news

I would therefore describe myself as a specialised income-oriented value investor.

The easiest way to find securities (shares and fixed-income) that the market is worried about is to look at yields: high yields tell you what the market is selling. (Of course this approach excludes a whole section of the stock market that doesn't pay its owners an income - in fact most shares. To cover that part of the market you have to be a fully-fledged value investor.) However, yield can be a dangerous signal: whilst high yield can really be a signal of imminent disaster; it can also be a signpost to super capital gains.

As for my investment 'architecture', I can sum it up as online (i.e. web-based), using tax-shielded investment accounts (ISAs and SIPPs in the UK). Plus keeping it as simple as possible - with the longer-term objective of handing over the portfolio to someone else; hence increasing the proportion of income-producing ETFs, that I hope will make the portfolio easier to manage.

But let's come to the 'rules'. Most readers will be aware that for buying, I look at yield but also at a range of other factors, including cash flow, debt, P/E ratio, business model etc. - much like an ordinary value investor.

For selling I use a ratio - let's call it the DIYII Ratio:

Capital Gain/Loss / Current Annual Income

I aim to sell only in three situations:
  • when I have made a capital gain and this ratio reaches 5 (i.e. I have earned capital gains equivalent to 5 years-worth of current income (based on fixed-income coupon or actual/forecast dividends). This rule helps me try not to sell too soon.
  • when I have made a capital loss and this ratio reaches -10. I really don't like selling a loser, because my experience is that most losers eventually recover. But not always, so sometimes I need to clear out a poorly chosen purchase.
  • when there is some dramatic news that means that the security is no longer worth holding.

Most of the time, the portfolio ticks along nicely - throwing off cash for reinvestment.

But, as you have probably gathered, I am bored at the moment. I have been watching my largest single holdingCity of London Investment Group (CLIG) rising and falling - and showing, by far, the largest capital gain in the portfolio. I first bought this in 2013 and that tranche (the potential 'hand grenade' I called it) was showing capital gains of over 40%.

To many investors, that might seem like a fairly modest gain - but I can assure that in my particular corner of the stock market I very rarely achieve that. However, what was problematic (with reference to my 'sell' rule) was that the DIYII Ratio had not yet reached that target of 5 - mainly because the yield remains stubbornly high.

But, I'm afraid I made an executive decision and broke the rule, realising a 42% capital gain since August 2013 - on top of the 7-8% dividend yield. I still have a lot of CLIG left but feel some relief that I am not so exposed to a potential sudden downturn.

Having just had a mad fling at an AIM share, I must revert to the main strategy and invest the proceeds in a diversified income-producing ETF.

[Sale price: £3.3025]

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. Good heavens. And the xd date isn't until 15.2!! Grafenia seems to be in free fall despite the good yield. I think I'll do the ninja thing today and sit on my turtle - no dealing. It was a bit tempting on reading your blog at first to swap the CLIG for some GRA, but I probably don't have your exposure to CLIG and that is making me reluctant to act....

  2. CLIG has maintained dividends through some fairly torrid times. The yield has fallen to just over 7% but is still one of the highest available from a company trading in line with expectations. Emerging markets will remain volatile for sure but for income seekers I see no reason to sell. In contrast many Reits and infrastructure funds are trading on 15% premiums which I think is unsustainable. Have just sold out of FCPT on our mans 5 ratio rule as it is on a premium of 17.5% to nav. Might buy some more CLIG!