Another milestone: the 2014/5 financial year comes to a close. The DIY Income Investor portfolio closes the year (one day to go) with a total return - capital gains plus rolled-up income - of just over 9%.
My view is that this seems a fairly pedestrian performance compared with previous years. Yes, it's better than cash (even the 6%-plus return you can get from Ratesetter) but nothing extraordinary. So, the question is: how good or bad is this result? And could I have done better?
To my mind, investment is a life-long activity. There is no point in accumulating a little portion of wealth if it is dissipated or squandered in a couple of years - I look on it as a garden to be tended as it grows. The results of successful investment can also provide a charitable donation or passed on to family: the legacy can be both the wealth itself and the approach to accumulating and maintaining wealth; the money skills.
Financial markets - and economies - evolve over a long time-frame, sometimes decades. And it is always different: what happened before may not happen again. Changes in the short term may often be mainly 'noise' - random fluctuation - and should not be given too much significance. However, a 'year' - be it calendar or financial - is a reasonable time-frame to review performance, with the proviso that you must try to view this performance in a wider context, spanning years.
In any case, most investment portfolios need some maintenance and updating - particularly an income-oriented portfolio, which is throwing off a lot of cash for reinvestment. Each new sale or purchase subtly changes the character of the portfolio - portfolio evolution, so to speak. Periodic reviews of performance are helpful in reassessing the overall 'direction of travel': is the portfolio still working? If not, what changes are required? In fact it is probably wise to review the past 12 months every quarter.
First the benchmarks:
- inflation: it used to be a challenge to beat inflation - not so today, with inflation dead in the water (so we are told, although a lot of my bills don't seem to follow the overall trend)
- cash: as I mention above, if you can't beat 6%, you really need to reappraise your investment skills
- the London market (total return, 1 year):
- FTSE 100: 7.9%
- FTSE All Share: 8.1%
- FTSE 250: 9.2%
- FTSE 350: 8.1%
- FTSE Small Cap: 6.2%
- FTSE Fledgling - which is not really my hunting ground: 12.3%
- FT Declared Dividend Index (a new one on me - higher-yielding FTSE350 companies): around 13%
- IUKD: 8.9%
- S&P 500 TR: 14%!
- VHYL (all world high dividend yield ETF): 10%!
In terms of dividend shares, this looks like a performance that is in-line with the market, although the focus on the UK helped to depress the overall result. Although I am not too impressed with VHYL's current (trailing) yield of 3%, you can't complain about the Total Return, given the low ETF cost. However, the DIY Income Investor philosophy means that at some stage I should take the money and run. (One holding of VHYL is showing an 'sell' indicator of 3.9 - when a level of 5 usually triggers a sale.)
So much for dividend shares. How did fixed-income do over the last 12 months?
- HYLD (all world high yield bonds ETF): -4.6%!?
- SEML (Emerging Market bonds ETF): -9.8%!?
- SHYG (Euro bonds ETF): 0.8%
- SHYU (US$ bonds ETF): 1.5%
This means that around half the portfolio has not really contributed a lot in terms of Total Return over the year.
Around the world's markets, the big returns were made in Shanghai (85%!! - who'd have thought?) and Tokyo (32%) - if you were out of these markets (as I was) you missed the boat. IAPD (the Asia Pacific dividend ETF, which unfortunately includes only 10% Japan) was down: -4.4%.
The other big mover was commodities - if you were short commodities you would have made a bomb (over 40% on the Morningstar Commodity Index). Unfortunately, I am - in effect - long commodities (via APF's royalties), so that hasn't worked out too well. So far.
And so it goes: the DIY Income Investor portfolio seems to be holding a lot of assets that have not performed. However, that is the nature of the beast: investing in 'high-yield' securities means picking up what is out-of-favour and waiting. And some things can stay out of favour for a long time (but, hey, they're generating income...).
Taking a longer perspective, what are the trends?
- UK: I hear a lot of ordinary people talking about UKIP - there could be a major upset in the up-coming elections. However, UKIP's natural coalition partners are the Conservatives, who (I think) together with the LibDems have done an amazing job of reducing the deficit without triggering a General Strike. I think the Conservatives would also do a deal with the Scottish Nationalists, if needed. Conclusion: UK business as usual.
- Quantitative Easing: These massive injections of cash into the markets have had a distorting effect that will have to be unwound: the consensus seems to be that this will dampen both the bond and equity markets. Clearly this process is taking longer than expected in the UK and the US. It will take longer still in Japan. And QE is only beginning in Euroland. Conclusion: keep Euro bonds, as they are like to appreciate - but ease out of any others where I am showing significant capital gains.
- Euroland/Grexit: So difficult to decipher at the moment - but I'm betting on survival of the Euroland, as it currently is. Conclusion: keep Euro bonds and dividend shares.
- China: Loss of economic momentum in China has shaken worldwide confidence. Is it likely to recover? I'm betting 'yes', given the rising middle class (and look at the Shanghai stock gains) - although in the longer term I see another Japan, with an ageing population and increased cost of labour. Conclusion: look for China-oriented bond/equity ETFs with an attractive yield.
- Japan: I'm betting the good performance in the last 12 months is a QE-funded bubble. Conclusion: avoid.
- Commodities: see China (above). Conclusion: continue to hold APF.
I think that means, overall, no major change in strategy. Am I wrong? Anyway, here's looking forward to the next quarter's, fascinating and fairly unpredictable developments.
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.