Weekend reading: Why I’ve sold a few shares as the bull marches on

My Saturday comments, followed by the usual list of links to other good blog posts and articles.

Last month I found myself in the novel position of feeling a bit uncertain about the stock market rally.

For much of the past 18 months I’ve felt like the only bull in the blogosphere:

• Back in March 2009, I was selling anything that wasn’t nailed down to raise more money to buy shares.

• All last summer I wrote about how the stock market rally was rational, after such a big crash – especially in the light of the ten-year bear market.

• I wish I’d kept a list of the blogs I commented on who were urging readers not to invest. Not because we don’t all make mistakes (I certainly do!) but because some didn’t acknowledge their mistakes later. A few pessimists then now write like they thought the rally was the most natural thing in the world.

I’m not saying I had any special insights. I just saw shares as cheap, and that there was no reason why they wouldn’t rise eventually. I was prepared to wait for years if I had to, but the gains came much quicker than anyone expected.

Markets can do anything on a five-year view. Never forget it!

As always, readers of any blog – including Monevator – are probably best trickling money in every month, Oblivious Investor style. I do personally try to time and trade around the edges and I do okay, but academia isn’t on my side.

That was then, this is now

What a difference a year and a bit makes:

• Every kind of asset has rallied.

• The UK’s 100 biggest companies are up around 65% in 13 months from the bottom in March 2009.

• The extreme fear that saw some top-rated corporate bonds yielding more than twice the rate on 10-year gilts is long gone.

• Investors are no longer paying negative interest to own U.S. Treasuries like in late 2008. Other strange anomalies have subsided, too.

• Even commercial property – hated last summer – has rallied.

Add it all up and I entered April feeling nervous about my extreme exposure to equities. What began as a few trades to use up some of my capital gains tax allowance became a move to take some risk off the table.

Putting it into perspective

A quick word on the personal circumstances that influence my investing.

Sometimes you read about people’s portfolios, and you think, “Wow, they’re brave buying all those small caps!”

Later you discover they only have £5,000 invested in total, which is dwarfed by their house, their pension, and their income. They’re not brave, they’re just playing with money they can afford to lose. And there’s nothing wrong with that, provided you appreciate where they’re coming from.

So while I don’t feel comfortable sharing hard numbers on the Internet, it might be helpful to put my decisions into perspective.

One way to do that is to compare my net worth with my gross annual income (i.e. my income before tax).

Roughly speaking (I’m doing this maths in my head!) my net worth has rebounded from a little less than twice my gross annual income at the low point of early 2009 to approximately four times as much today.

In other words, my net worth has doubled, since all my money is in cash and shares.

• After my sales, I now hold around two-thirds of my gross income in cash. (I also have free cash in my freelance business, which I don’t count here).

• The rest of my portfolio – over three times my gross income – is still in trackers, investment trusts, individual shares, and a smattering of VCTs. I also have a minor shareholding in a (second) private company.

• I own no property directly, and have no pension (but plenty of investments in tax-exempt ISAs, which I could turn into a self-invested personal pension if I wanted to).

• I currently hold no bonds. I don’t miss corporate bonds, but I’d like to add some Government bonds if/when I can get at least a 2% real yield on ten-year gilts.

• I own some commercial property via shares.

It might sound like I’m carrying a lot of cash, but in fact I’m arguably still over-exposed to the stock market, given I may want to buy a property at some point (I’m single and in my mid-30s) and I have no bonds.

My problem regarding housing and asset allocation is two-fold:

• I still think UK house prices are too high. I can easily imagine renting for a decade given current valuations – which means I need to keep what would (and arguably should) be short-term money invested for the long-term to beat inflation. I talked about not admitting mistakes above… my biggest mistake is I’ve thought residential property is too expensive since 2003. That’s cost me at least £100,000.

• I’m self-employed. Even if I wanted to buy at these valuations, the credit crunch has removed most deals for the self-employed, and self-certification mortgages are now rarer than honest estate agents. This is annoying, as it means I’d need to take more money out of my business than I want or need to, just to increase my annual income for a year to get a mortgage.

The house situation is a complete P.I.T.A., to be honest.

I’m minded to just keep buying income for financial freedom and forget about the house – my rent is much less than I’d pay as a mortgage – but perhaps I’m too British for that.

The result is my portfolio hovers between ‘far too much equity risk if you want to buy a house’ and ‘far too much cash for optimum medium to long-term returns’.

As I always say, read Monevator for entertaining articles and insights, NOT to do what I do!

What I sold and bought

Generally I’ve sold stuff outside of my ISAs where I had a capital gain to realize.

My long-term tracker funds in ISAs remain untouched, but I sold down around 15 cent of my non-ISA trading portfolio to raise cash (defusing some capital gains).

Indeed, I funded my ISA allocation for 2010/11 by selling non-ISA shares, rather than out of my cash savings.

It’s not been easy deciding what to sell. P/E ratios still don’t look stretched to me for many individual companies. We could well be at the start of a new multi-year bull market, even if the rather high market P/E will limit how quickly it can race ahead.

• I’ve reluctantly sold around 1/5th of my investment in my beloved bank Standard Chartered. After 70% gains it was just too overweight to ignore.

• I also sold my holding in Polar Capital Technology (for over a 100% gain in a year). I’d buy this back on weakness. Technology looks cheap.

• I (again reluctantly) sold half my holding in RIT Capital Partners. This was for just a 15% gain or so; RIT wobbled a bit in 2009 due to its private equity exposure. But the discount on the trust has recently closed to near-zero from more than 10%, and I wanted more cash.

• I banked good profits in Anglo American, BHP Billiton, Pearson, and (less good) HSBC.

Besides CGT issues, I’ve focused my selling on partly reducing my exposure to dollar earnings, which I really went to town on last year as a play on the weak pound. Even the likes of The Guardian are writing about this now, so I’m assuming it’s in the price.

I’m also investing my new ISA money more defensively.

For instance, I re-jigged my commercial property holdings in favour of cheap and lightly-geared Daejan. I’ve also put a slug into my favourite boring utility, Scottish and Southern, which is yielding over 6%.

I do retain a few small cap share picks. Recent purchases include the model railway maker Hornby and property developer Quintain.

Note: I do not recommend this sort of fiddling as a route to profits. I do it with a portion of my portfolio for the same reason some people drink, and others chase girls. Academics have proven you’re best investing regularly into an index tracker, ideally as part of a mix of different assets for safety.

That’s enough about me

I hope this post gives a bit of context to my views. To back it up, I’ll look more closely at the current valuations of different asset classes next week (subscribe to get it).

Before the links, I’ll just add that if you missed Jacob’s guest post yesterday on living frugally, you should really check it out. I also posted about UK income tax, and introduced the Keynes versus Hayek debate – with a sexy video!

Some interesting money blog posts

All from my fellow Yakezie money blogs this week.

• On the Wealth of Nations (book review) – The Amateur Financier
• Combating the reverse psychology close – Eliminate the Muda
• Financial lessons from running – Engineer your Finances
• Over the hill at 40? – Financial Samurai
• Credit card stuff to sweat – Sweating the Big Stuff (by MrCreditCard)
• 6 steps to collecting money owed to you – Wealth Pilgrim
• What’s the best travel search engine? – Funny money blogger Len Penzo
• Never lend to your family and friends – Couple Money
• Book review: In the trenches, surviving tough times – MoneyFunk
• Expenses that are like lifetime debts – Money Reasons

Some highlights from the financial press

• Real middle-class Britain – The Economist (thanks Niklas!)
• How the West was lost under a borrowing binge – Stock Tickle
• Parties line up new property wealth taxes – FT
• Goldman accused of sub-prime fraud – FT
• 10 islands for sale around the world – Times Money blog
• Warning over structured products in ISAs – The Times
• Stock market rally simply reinvested cash? – The Telegraph
• Precious metals prove white hot – The Telegraph
• The election manifestos and your cash – The Independent

Still alive after all those words? Want more? Subscribe to get my weekly roundup every week.