Not As Bad As It Seems?

For this DIY Income Investor it's been a horrible couple of months - my family portfolio is down nearly 5% on the year. So I have taken my own advice - I've left my investments to look after themselves and got on with other activities.

It is hard for anyone invested in the stock market not to be spooked by the sudden downturn but it is rarely correct to sell up when prices are diving. As long as you have targeted reasonably sustainable yields, you should be able to weather a short-to-medium period of depressed prices by just sitting tight.

But all is not 'doom and gloom' - there might be some light appearing at the end of the tunnel.

Regular readers will be aware that the DIY Income Investor portfolio is fairly well diversified geographically (composed of dividend shares, fixed-income securities and ETFs investing in both of these) but that it has picked up a bias towards commodities and Emerging Markets - primarily as a result of following the best yields available. This bias means that it has been hit fairly hard by the current world economic downturn.

The origins of the current stock market turmoil appear to be a combination of an apparent slow-down in China and a slump in commodity prices (including oil) - particularly the bursting of the Shanghai Stock Market bubble. To this are added concerns about the rise in the US Dollar (in which many commodities are priced). China still weighs heavily on the market - as the Wall Street Journal reports.

However, things in China are not exactly disastrous - the consensus for 2015 is still GDP growth of around 7%. (A range of views about the official data are discussed by CNBC.) China may well be going through a transition from an export manufacturing orientation to more a more domestically oriented service economy. Paradoxically, this could be a very stabilising evolution.

In addition, the slump in commodity prices is partly due to increases in supply (certainly new shale oil production has significantly affected oil and gas prices). This should - in time - be good for the world economy, although not particularly encouraging for commodity producers, who may now have to shelve their more expensive projects.

The IMF is cautiously optimistic about world economic prospects, although recognising that significant risks exist.

So, there are still difficult weeks and months to go - but I am resigned to sitting tight, collecting the income that goes with high-yield investing and waiting for stock market prices to recover in 2016. Although total investment and savings income has fallen by about 5% in 2015, cash remains a major proportion of our total financial resources (currently around one-third), with cash yields of around 6% available from my favoured peer-to-peer lender Ratesetter.

(More about how to get the best cash returns in the next article.)


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.