Tuesday 14 April 2015

What a Difference a Week Makes (Portfolio Sale)


I've been AWOL and AFK* for a week - cut off from civilisation in deepest Oxfordshire; no news or share-price up-dates.

Firing up the spreadsheet on Monday morning - a little apprehensively - I was very pleased to see that the DIY Income Investor portfolio has hit another all-time high valuation. It could have gone the other way, of course.

With the portfolio increasingly on ETF autopilot, there should be less and less to do. However this week it did seem necessary to sell something - and it was an ETF. Here's why...

A quick recap for any new readers: the DIY Income Investor portfolio is made up of stock market securities that produce income: they all have high(ish) yield - either from share dividends or bond 'coupons'. To minimise risk and admin, I have been reducing the proportion of the portfolio in directly-owned securities and increasing the share of ETFs (Exchange Traded Funds) that have diversified holdings of similar securities (shares or bonds). I try to keep a balance between dividend shares and bonds.

The key criteria for purchases and sales are:
  • the yield (forecast, where available; if not historic trailing-12-months)
  • the change in price or capital gain/loss
  • (other criteria relate to likely sustainability of the income)

'Yield' and 'price' are of course (usually) inversely related: price goes up, yield goes down. The market being the efficient voting machine that it is, securities with a high yield are usually out-of favour because there is some risk that spooks the market. The trick of high-yield investing (if there is one) is judging whether the perceived risk will materialise or not.

I don't claim to have a get-rich-quick formula: I like to think of myself as a medium-term investor who will take advantage of price surges. So, I like to think in 5-year periods: my key 'sell' criterion compares the income that any holding might accumulate over 5 years with any capital gain. If I can sell now and make more than I would holding the thing for the next 5 years, then I'll consider selling. (I also have a 'sell' rule for losers - but that is rarely triggered, fortunately.)

Back to ETFs. Because the ETFs I buy are diversified holdings of many similar securities (with less risk), the typical ETF yield that I would accept is lower than I would look for with a single, directly-held security (which would probably be a higher risk). Let's say 4% plus (preferably 5% plus). This lower initial yield (compared with the 7%. 8%, 9% of some of the riskier single securities) means that the price of the ETF doesn't have to move a lot to trigger my 'sell' rule. That means that, although the whole point of buying more ETFs is to reduce the need for day-to-day attention, an ETF-only portfolio still requires some attention to make sure it is still ticking over nicely.

Thus it is with my holding of XGSD (db x-trackers Stoxx Global Select Dividend 100 UCITS ETF). I bought this over 2 years ago with the intention of diversifying the portfolio. This ETF uses indirect replication, rather than owning securities directly - unlike the rest of my other ETFs. The historic yield has now fallen to under 2% - triggering the 'sell' signal (I would have to continue to hold it for over 6 years at this yield to equal the capital gain). Having said that, the capital gain is not actually huge - only 14% - but, hey, it's something.

The other factor in the decision is that I also hold another worldwide dividend ETF, Vanguard's VHYL, which has a higher yield. Selling XGSD simplifies the portfolio and gives me some new cash to reinvest.

So, what difference did a week away make? Not much!

[Sale price: £21.68]

(* AFK = Away From Keyboard)

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. Hi DIY,

    Could you please refresh me on your sell rule? When capital gains exceeds 5 times current yield, or yield on cost? Do you take into account the amount of dividends already received? I believe you don't, am I right?

    It is very refreshing to see people actually sell their holdings when it goes up, instead of just only buying and never ever selling!

    1. Yes GMGH - it's like opportunity cost. Current yield, either trailing 12 months or forecast (if avilable). Ignoring dividends already received.

    2. Hi DIY,

      Thanks for the reply :)