Tuesday, 9 January 2018

Goodbye 2017

Funny happy new year 2018 wishes
Source


Happy New Year to all DIY investors!

The DIY Income Investor portfolio has done OK during 2017 - but a number of poor investment choices held back the overall total return.

So - how to make better choices in the New Year?

The overall Total Return (i.e. income + capital gain) for the DIY Income Investor portfolio for the calendar year 2017 was 5.8%. Given that the overall yield on the portfolio is around 5.6%, this means that there was no capital gain over the year.  By comparison, the Total Return for the Financial Year 2016/17 was 25.5% - a very different kind of result.

As regular readers will be aware, the portfolio is split fairly evenly between dividend shares and fixed-income securities (such are bonds). Similarly there is an approximately even split between Exchange Traded Funds (and other collective investments, spread world-wide) and direct investments in securities quoted on the London Stock Exchange. Interestingly, the ETFs have performed better than the direct investments.

 Investors with some experience will be familiar with the problem of dealing with a poor result. There is always a struggle against the emotional reaction of 'failure'. However, I have survived much worse results and can feel fairly optimistic about the future - particularly since January 2018 is turning out to be quite a positive month so far.

Review of approach

A New Year is a good time to review your investment approach and to set the parameters for the coming year.

To summarise, the basic strategy of the DIY Income Investor portfolio is based on the following considerations:
  • Investing is difficult because of our behavioural reactions to loss (and gain) - it is easier to 'work with the grain' of our 'monkey brain' emotions than to oppose them
  • Investing for income taps into the mechanism of yield, which provides a useful signal of the market's sentiment towards a particular security - it also provides income for expenditure or re-investment
  • The market over-reacts - both in optimism and pessimism
  • With some basic analysis, it is possible to identify securities that may be unreasonably downgraded (although this is not foolproof, as high yield is a symptom of high risk)
  • More often than not, the 'worst' does not happen and securities that are downgraded by the market often recover - ideally you (as an investor) should be rewarded with an income while you wait for this to happen
  • Sometimes the approach does not work and, in some cases, a particular investment will go 'pear-shaped' but in many cases the investment will recover - over time
So far, so good: this approach has worked pretty well over the past 10 years or so (have a look at the Portfolio page above for a summary of results over the years).

However, there have been too many poor choices in 2016/17:
All were bought on the basis of their high yield (at the time of purchase).  In all cases, the high yield was an indication of an underlying problem that surfaced, resulting in a sharp price fall and a cancellation of (or large reduction in) the income stream.

The reasons for the mis-choices were probably due to a combination of factors:
  • optimism
  • insufficient review of company reports
  • mis-reading of trends in the UK economy.

More about this in future posts....


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.

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