Entries Tagged 'Investing' ↓

Back in September 2007, I concluded a series on how to roll your own income generating high-yield portfolio (HYP) of leading UK shares with an article that put together an example portfolio.

I’ve not tracked that portfolio’s performance, but I’m sure its value has fallen; we’ve been in a bear market, and high-yield dividend payers have suffered at least as much as any other shares. (The paid-for equivalent, the equity income funds, have certainly slumped.)

I’m not too bothered by that September HYP’s decline, however, for five reasons:

• Short timescale: Six months is a ridiculously short-term in which to judge a share portfolio’s performance - come back in five years, or better ten.
• Volatility in inevitable: There are no guarantees in stock market investing - shares can, famously, go up and down. This happen however and whenever you invest. If you’re risk averse but want market exposure, consider drip-feeding in your money, which will likely reduce your overall returns but will at least avoid you putting money in at exactly the wrong time.
• HYPs are all about income: So far as I know, none of the 20 shares I put into my example portfolio have cut their dividends.
• I don’t give advice: Please read my disclaimer.
• Many blue chips are now cheap: It looks a great time to top-up the HYP.

The last point is the most crucial (aside from that disclaimer!). In my view, it’s vital to understand that bear markets are a buying opportunity. If you can’t get your head around the idea that cheap shares are good for you right up until the day you sell them, you’ll never make the money you might in the stock market.

Now, I don’t say this is easy. In my early days of investing I expected overnight gains in small caps, and would get dismayed when shares gyrated. I wanted to a stately rise, like going up the escalator to the higher realms of a classy department store.

But Warren Buffet, who is always worth listening to, puts it this way: If you expect to be a net buyer of hamburgers over the next five years, why would you want hamburgers to go up in price?

Share price rises are of course vital if you’re trading over the short-term, but the HYP approach is about getting a rising income from shares over the long-term. You shouldn’t be selling your shares unless the dividend is cut or the yield falls too low, and possibly not even then. You might well keep your shares when you retire, to supplement (or even comprise) your pension.

This mindset works a lot better if you’re still growing your funds, of course, and thus have a steady supply of new capital to benefit from market falls. While you can buy new shares out of dividend income, you’ll only make a small impact on your portfolio every year, relative to the portfolio’s size; in contrast, in the early years your salary will provide the biggest boost to your holdings.

A good time to buy a HYP?

Enough of the pep talk, what about buying dividend payers today? Well, the good news for those with some money to spare is that high-yield UK shares look pretty cheap.

The Financial Times, for instance, says the yield available on shares suggests the UK markets is cheap. And while it warns us to expect some cuts ahead, it points to 12 blue chip dividend-paying FTSE 100 shares that look particularly secure, and thus good value for income seekers:

Mr Secker says there are 12 blue chip companies where the dividend is sustainable for the next 1-2 years and where the trailing dividend yield is either already, or set to, rise above 5 per cent.

These are Vodafone, GlaxoSmithKline, BP, Royal Dutch Shell, Land Securities, Aviva, National Grid and Scottish & Southern Energy, Pearson, which owns the Financial Times, Home Retail Group, Marks and Spencer and British American Tobacco.

The first thing that strikes me is how nicely diversified a bunch of shares that is. You’ve got Telecoms, Energy, Property, Insurance, Utilities, Retail, Media, Drugs and Tobacco all in one portfolio. Add a bank (or possibly half measures split between two companies, given the current banking woes) and you’d have most of the market represented.

Remember, sector diversification is vital when choosing shares for a HYP, as is a sustainable dividend.

Personally, I’d add a few more shares to that selection if constructing a HYP from scratch right now, to ensure I had at least 15 companies in my collection. That aside, with its strong dividend cover and a starting yield of around 5% - higher than UK gilts, presently - I’d be highly surprised if that portfolio didn’t do very nicely over the next 5-10 years.

Why not read my introduction to high-yield if you’ve only just tuned into Monevator? And please do consider subscribing to this site (it’s free) to keep up-to-date on HYP prospects.

Andy Brough, manager of the Schroder UK Mid 250 Fund, sounds pretty upbeat in this interesting commentary on the state of the market:

Not quite sure why they had to interview him in an oil sheik’s bathroom…Still, there is something reassuringly blokey about Brough, given that the man in charge of billions (and undoubtedly worth millions himself). Note though that Brough has sounded upbeat for a bit, even as shares have fallen further.Back in January he pointed out in The Telegraph that some people were certainly seeing value in companies at these prices - the financial directors at the leading companies themselves:

Well financed companies, together with directors, are taking advantage of the shake-out to acquire shares.

Among directors, there are 11 buys for every one sell, while companies themselves are buying back between £100m and £200m of their shares daily. On average, that is £2.25bn a month, which, put in context, is like removing the 100th largest company in the UK stock market every single month. Corporate activity, previously led by the venture capitalists, is now being led by companies themselves.

Four FTSE 100 stocks (ICI, Resolution, Kelda and Scottish & Newcastle) have all received cash bids that total around £20bn and buyers are now focusing on some of the smaller companies, with Whatman, GCap and Forth Ports seeing interest from potential buyers.

Are UK shares a bargain? Brough’s Mid Cap hunting ground has certainly fallen further and harder than the FTSE 100, and overall UK shares are on lower P/E ratings than in the US, where the market still seems to expect profits to hold up despite the credit crisis and housing falls.

GE on Wall Street sent the markets down with a profit downgrade last Thursday, and it’s very hard to believe it’s the last; Brough’s views do seem to assume we muddle through without the financial sector woes sending the wider economy into recession.

The Dividend Growth Investor blog has an interesting post about long-term dividend investing. His rule of thumb is that a dollar saved in your twenties will provide a dollar a year in your sixties:

I found that the average time it took a $1,000 investment to produce $1,000 in dividend income for a full year was 35 years. In other words if you contributed $1,000 towards your retirement by investing in a broadly diversified stock index fund when you are 23 in 2008, you would expect to achieve $1,000 in dividend income on average by the age of 58.

The chart below shows that the longest period to achieve the desired dividend income was 45 years, for those who started in 1928. The shortest it took to achieve $1,000 in dividend income from a $1,000 investment was only 27 years for those who started in 1941.

On a less positive note, the writer points out that US dividend investors have had to wait longer every year for their dollar return payout, due to decreasing dividend yields.

Regular readers will know I’m a big fan of dividend investing for UK investors; check out my High Yield Portfolio series. A portfolio skewed towards higher dividend-paying companies rather than the index used by the writer above should reduce the time you have to wait for the ‘£1 in/£1 a year out’ point to be reached, too, although don’t tell any Noble prize winning economists…

So, would the 20s/60s rule hold up in the UK? Intuitively, I suspect so, since UK companies pay a higher and more consistent proportion of their income out as dividends than any other major market in the world. However I haven’t done the maths to prove it. An interesting project for the future…

This post is one of a series on the changes to the UK personal tax regime introduced in the 2008/09 financial year.

All Capital Gains Tax charged at 18%

We all have a personal allowance, currently £9,600 (and distinct from your personal income tax allowance) before Capital Gains Tax is due. You are also allowed to dispose of personal goods of up to £6,000 every year, and generally your main home is free of Capital Gains tax as well.

After that, you’ll be charged on gains at 18%.

Rarely has a new law seemed so sensible, yet so widely derided by the press and public, as the rushed implementation of this flat Capital Gains Tax (CGT) regime.

The idea of a single, flat rate of CGT has much to commend it. Having a hodge podge of rates for AIM shares, business assets, and investments held for different periods of time was a pain in the posterior neck.

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This is the first in my special five-part series entitled Five big boring tax changes that will make you richer or poorer in 2008/09. For the others, please see the introduction to the series.

From April 6th 2008, ISA rules for UK residents change as follows:

• Your annual total ISA allowance rises to £7,200, and the stupid ‘maxi’ and ‘mini’ ISA distinction is abolished.
• Instead, you can get a cash ISA and/or a Stocks & Shares ISA.
• You can invest from £0 to £3,600 in a cash ISA during the year, and the balance (up to your total of £7,200) into a Stocks & Shares ISA.
• Personal Equity Plans (PEPs) held from the 1990s are reclassified as Stocks & Shares ISAs.
• You will be able to convert cash ISAs into Stocks & Shares ISAs in the future, but not vice-versa.

Why you should use ISAs to save tax

ISAs (Individual Savings Accounts) are a UK investor’s best friend – arguably better than personal pensions. You can hold loads of different types of assets in them, including shares, cash, investment trusts, unit trusts, and bond funds, and you don’t have to pay extra tax on the income you receive in them. Nor do you pay on capital gains on investments held in an ISA when you sell.

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Stock markets have been falling for months, led by a collapse in confidence in the financial system and plunging bank stocks. In the UK we’ve seen Northern Rock crumble, while in the US the investment bank Bear Stearns lived up to its name after jitters led to rumours which led to a run on its assets, ultimately forcing it towards bankruptcy and into the arms of JP Morgan.

I happened to watch some of Washington’s investigations into the Fed-backed buy-up of Bear Sterns on Bloomberg yesterday. The CEOs of both Bear and JP Morgan were there to account for themselves, sitting side-by-side as if in some slow bit of a Shakespearian tragedy. (You can read JP Morgan’s testimony over on Forbes).

I’ve also watched Fed chairman giving evidence in recent months defending his attempts to alleviate the blockage in the credit markets, and his deep cuts in interest rates.

What’s all this mean, apart from that I need to get out more?

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If you invest in the stock markets and recently you’ve had to check your portfolio with a stiff drink, at least you’re not alone. According to the FT:

Stock markets finished their worst quarter in more than five years on Monday with further losses as investors continued to favour less risky assets.

The losses have seen many equity markets enter bear market territory – a fall of 20 per cent from recent peaks – over the last three months as a result of deepening fears about a US recession and continued tensions in credit markets.

For the UK’s FTSE 100, the S&P 500 index in the US and the pan-European FTSE Eurofirst 300, this was the worst quarterly performance since the third quarter of 2002, when accounting scandals at Enron and WorldCom sparked a global equity sell-off.

Of course, if you’re buying shares for the long-term than this is good news, although I agree it doesn’t always feel like it. Cheaper is better, remember?

In particular, Japan now looks seriously under-valued. The Nikkei 225 Average lost 2.3 per cent on the day, and finished at 12,525.54, down 17.4 per cent on the quarter. It was up at 18,000 just a year or two ago, and around 40,000 at its late 1980s peak.

The trouble with Japan is companies pay very low dividends, which makes it impossible to construct a dividend-based portfolio. This means you have to sit around hoping the index goes up again, with no income in-between. An expensive waste of time, recently.

So you’ve done your four basic sanity checks to ensure you survive the credit crisis: Your savings are safe, they’re earning at the higher rates of interest now available, you’ve got a plan to pay off any debt, and your mortgage is sorted for the foreseeable future.

Time to turn over and fall back to sleep?

Possibly… it’s usually a bit late to Do Something once a financial crisis is underway, and ‘Sell in haste, repent at leisure’ would be a good motto for us investors to pin above our PCs. If you follow the daily advice of the financial TV channels and churn, churn, churn with every wobble, the only person who’ll get rich is your stockbroker.

On the other hand, any financial crisis can be frightening, and the best way to fight fear is to be informed.

I think it’s best to calmly consider where you’re at, financially, and where you’re going, rather than fixate on screens full of red or speculation that the White House is going to have to be pawned off to pay down the US trade deficit. It’s an absolute certainty we’ll all encounter several testing times when saving and investing over our lifetimes, and cultivating a calm head will save you a fortune.

Stopping economic turmoil derailing your investment or retirement goals means keeping your eyes on the bigger picture, in good times as well as bad. Sure, it’s important to check your short-term money is secure (that your savings are safe, and that you won’t soon face a steeply higher mortgage bills, as I covered previously) but beyond that you really might be best doing nothing at all and waiting for the storm to pass.

Indeed, I’ve taken quite a general view with these four more longer-term financial health checks, since I’m absolutely certain I’ll need to refer to them again regarding some fresh crisis in the years to come!

1. Check your portfolio… calmly

At times of financial crisis, stock markets fall.

If you’ve substantial investments in stock market funds, general or sector specific, you’re likely well down.

Most sectors are hit, usually before any impact is apparent in the wider economy. Sometimes a specific sector hurts the most, as with the dotcom bust (although people forget lots of ‘bricks-and-mortar’ shares fell in the years previously, so it wasn’t quite so clear cut). The only consistent exceptions in this current crisis are investments related to commodities, and the market indices of countries dominated by miners and other commodity producers.

Has the world really changed enough to make a big supermarket retailer, a provider of networking technology AND a manufacturer of metal cans worth 10/20/50% less than a few months ago? Of course not. They were either overvalued then, or they’re undervalued now. Company specific falls in bull markets reveal bad news about the company, but general falls in bear markets tell you nothing about the company and everything about the market.

Note also that no crisis is all bad news, financially-speaking, since different asset types respond in different ways.

In this current credit crunch of 2007/2008, gold has risen. So have government bonds, such as US Treasuries and UK Gilts, due to their rock solid security. Corporate bonds have wobbled on credit fears, while interest rates on savings are up, even as Central Bank base rates in the UK and US have been cut, which is good for anyone with cash. Finally, house prices have started falling.

It’s because different assets behave in different ways in each crisis that experts urge us to diversify our portfolios, rather than putting all our money in stocks, bonds or property alone, or stuffing it all under the mattress. As asset going up will ease the unpleasantness of something else going down, just like the sugary syrup they put in children’s medicine.

What it means for us

• Collective investments such as funds and index trackers gyrate or fall when the stock market is unsettled. (During this current credit crisis they’re lurching up and down every week).
• Pensions linked to the stock market will also be down.
• Most investors’ current net worth will fall. If you’ve a big portfolio built over many years, the numbers can seem unreal and frightening when compared to say your salary.
• Diversified investing will reduce the pain.

Action plan

• Unless you’ve been silly (putting all your money into real estate, or tech start-ups, or a palm oil plantation, or some other overweight bet) the best plan is almost certainly to sit tight.
• Don’t sell just because the market falls. As Benjamen Graham said, just because a gloomy Mr Market has slouched up with a particular price on some particular day, that doesn’t mean you have to accept his price as final. Stock markets go up and down, and one day he’ll feel cheerful and generous again.
• If you sell every time the market falls, you’ll destroy your long-term gains…
• … unless you sell before they fall further, of course. But very few investors can consistently time market drops, and in my experience those who can seem to have trouble buying back in. As a result, few great investors are market timers. (For instance, Warren Buffet isn’t selling, and in fact he may be buying). Buying and holding over reasonable periods is a better strategy for nearly all of us, billionaires or not.
• If on sober reflection and several good night’s sleep you decide you really have overly exposed yourself to some particular market, consider slowly selling down your holdings. (Do consider though how you’ll feel if markets bounce back after you’ve sold out). With stock markets, it’s fairly easy to do this (which is why you should pause and think twice). With some assets, such as property, you’ll need to plan your disposals more carefully.
• Read up on asset allocation so you’re better diversified against future downturns. One very simple rule of thumb is to subtract your age from 100: hold your age in various bonds and the rest in shares. Some advocate an even simpler 50/50 ‘lazy’ strategy. The excellent My Money Blog has a fantastic primer on different asset allocation models. It’s US focussed, but the principals will apply in other countries, too.

2. Consider buying more shares while they’re cheap

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We can’t wish away the credit crisis. However sensible you or I have been with our investments, borrowing and spending, we can’t wind back the clock and stop bankers throwing money at poor people who’ll never be able to pay it back, and who are often now paying a far higher price – repossession, dislocation, or even bankruptcy.

The bankers did it, everyone got cold feet, and now we all have to live with the consequences.

However rather than putting on The Smiths, pouring myself a large gin and tonic, and turning to Sylvia Plath, I thought it’d be more useful to assemble a checklist to help you avoid suffering too much fallout from this banker bungling. Who knows, you might even come out of the credit crunch richer! Personally, I’ll be happy with older and wiser – and not much poorer…

Today I look at personal finances. Tomorrow I’ll offer quick checks on investment, your income and more, so please be sure to subscribe to my feed.

1. Get out of debt

Because of the credit crunch, money is becoming more expensive.

I’ve written before about why you must get out of debt. But with the credit crunch being described as a great ‘deleveraging’ (in human speak, banks are reluctant to make new loans, and may even be calling them in), borrowing money instead of saving to buy things is getting even more expensive.

What it means for us

• If you’re already in debt, I’m not saying your bank is going to call you up tomorrow and demand all it’s money back. Rather, the climate is turning against borrowers for the first time in years.
• Banks are increasing loan rates where they can.
• They are less willing to enable customers to shuffle debt using cheap balance transfers.
• They will look much more carefully at impaired credit records, which will be a factor if you’ve been missing payments.

Action plan

Get out of debt, ASAP. Normally blogs work best when writers tell you personal stories, but I hate debt with a passion and have avoided it ever since I left college. If you’re struggling with debt, one of several good blogs on the subject is Blogging Away Debt. (But please comeback soon!)

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Thanks to the recent stock market volatility, investors are increasingly turning to gold, which is traditionally a safe haven in troubled times. This article introduces Bullion Vault, a company that enables you to buy and securely store small amounts of the highest-grade gold, which the company claims offers unique advantages for small investors buying gold.

Why are investors buying gold?

Sales of gold via exchange traded instruments have soared recently, with funds that invest in gold mining shares such as Merrill Lynch’s Gold and General Investment Trust have produced returns of around 500% over the past five years.

In 1999 gold was trading at around $275 per ounce, which was when Gordon Brown, the UK’s then Chancellor of the Exchequer, decided to sell half the nation’s store, further depressing the price. Gold has since rallied very strongly. Having broken through the $900 per ounce mark in the past few months, it’s threatening to sail through $1,000 an ounce in 2008. (Thanks a bunch, Gordon!)

Fans of gold (so-called ‘gold bugs’) make the following case for investing in the yellow metal:

• As a real asset, gold is a hedge against inflation.
• Demand for physical gold is increasing, with new money from India and China said to be particularly keen on gold. (Indian farmers traditionally buy gold jewelry as a store of value.)
• Production difficulties are constraining supply. Power supply problems in South Africa are the current bugbear, but exhausted mines, political instability and environmental concerns perennially hamper production.
• Most gold in the world has probably already been mined.
• Even though gold has increased nearly four-fold in dollar terms since its lows in 1999, the previous high reached in 1980 would be around $2,000 today, adjusting for inflation.
• China and certain other central banks are now increasing their gold reserves.
• In a world of ‘paper’ or ‘fiat’ currencies, gold is the ultimate wealth preservation tool. The US can print all the paper money it wants, but it can’t conjure up gold.

There are also convincing arguments against gold

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