Thursday, 10 November 2016

De-Risked? (Portfolio Buy)

Source
If you are a UK-based investor you may - or may not - be enjoying yourself over the last month or so. The recent currency fluctuations have revealed something interesting about the DIY Income Investor portfolio, which will help to guide future investments.

Talking of which, I've been putting some more available cash to work with something a bit counter-intuitive.

It is unusual that you are able to 'stress-test' your own portfolio. But the currency and market fluctuations of the past month or so have been so extreme that it should be possible to make some conclusions about the stability of your portfolio.

The Crash

My own 'baptism of fire' came in 2007/08, when the global financial system nearly melted down. The value of my then portfolio - which was mainly invested in high-yield UK dividend shares - plummeted by a total of around 50%. I held on, grimly, to most of the portfolio, fearing that I had wasted the money that I had carefully saved over many years - but also aware that selling off at that time would just make the loss 'real'. However, fortunately, the portfolio recovered, initially by over 50% in 2009 ( that sounds good but - because of simple arithmetic - it was not until a few years later that the portfolio, more or less unchanged, fully recovered its earlier value.)

That shock led me to be more cautious and to diversify some of the risk I was taking with high-yield dividends by buying more fixed-interest securities like UK government debt, corporate bonds, preference shares and building society PIBS.

ETFs

At some stage - and this time without any traumatic experiences - I decided to diversify my currency risk as well as to simplify the investment approach (primarily for the pension-oriented SIPPs that would carry on - eventually - without my input) by buying Exchange Traded Funds specialised in dividend shares or fixed-income securities around the world. That decision had mixed success - and I discovered that ETFs didn't behave in the way that single securities do (surprise, surprise).

But they ended up doing what they were supposed to do - perhaps too well, as it turned out.

Brexit

The negative impact of the Brexit vote in the UK has produced the latest stress test - this time with a surprising result. The value of Sterling fell by 15% - the value of the portfolio soared, particularly the foreign ETFs. Then when the Pound strengthens - the portfolio falls.

As it turns out - and most investors were aware of this already - the London Stock Exchange is pretty international (at least the largest 100 companies quoted in London, the FTSE 100). Conclusion: by adding foreign ETFs I might have just over-egged the cake.

Trump

Finally, what could be more disruptive than an unexpected result to the US Presidential election?

As it happens the portfolio was down yesterday (the day the result was announced) but firmly up today, as international markets apparently decided things might turn out to be OK.

Latest Buy

So, my current strategy modification is to go a little more UK-centric and to focus on direct investment in single securities but to keep the international ETFs for the pensions.

The latest purchase (last week) is Countrywide (LSE:CWD) - the UK's largest estate agent, with a range of add-on property services. Because of the general sense of unease around the UK property sector, and expected poor second half results, the price has fallen - resulting in an attractive forward yield of over 7% coupled reasonable dividend cover and a diversified business model. The 2016 Interim Report looks OK to me.

The key to its value is whether the UK property market will really continue to lock up - I'm guessing not. And it seems like the market might be agreeing with me as the price is up since I purchased - testing the £2 level today.

[Purchase price: £1.873]


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.

3 comments:

  1. “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”


    ― Warren Buffett


    So, is it time to be 'greedy' as a lot of so called 'experts' are busy talking this company down!

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  2. I would be wary of buying into conventional estate agents such as Countrywide. Their stock has fallen due to new online only and DIY agencies such as Purplebricks gaining market share. The writing is on the wall for the traditional high st estate agents and at the very least they will have to cut their profit margins.

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  3. Looks like C Park was very accurate ... the question is whether DIY income investor is now selling Countrywide (especially as dividend cancelled) or holding for recovery?

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