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Where to invest in 2012 when you have too many shares

These are unusual times, when shares seem as risky as ever, but so do the alternatives.

A few weeks ago, I mentioned I’d stopped putting new money into shares around Christmas, and that I’d become more defensive in the active part of my portfolio.

I was also wondering where to stash the cash I’d raised from CGT defusing and a (still) imminent windfall lump sum.

Was there a good alternative to another Pavlovian lunge for equities?

It proved a lucky time to get reflective, given the subsequent market falls. I don’t claim to be able to call the market, but I do keep an eye on it, and now two years in a row I’ve been fortunate to see shares slip just after I’ve gotten slightly less gung-ho about valuations.

It all helps, but I don’t think I’ve developed an unflappable sense of market timing – amusing though it would be to claim as much in 100-pixel high letters on Seeking Alpha.

(Here’s my market call: Sooner or later the FTSE All-Share is going to be a lot higher, and likely on a loftier P/E rating. I don’t know when, and nor does anyone else. I invest in anticipation).

Besides, I was really just tinkering at the edges.

I have been extremely long the stock market since 20091 because to me equities seemed cheap compared to the alternatives, which mostly look about as appealing as drowning your sorrows with a Slush Puppy on the Titanic.

I didn’t set out to become quite so overweight in equities, nor for my lob-sided bet to last so long. I had hitherto always retained a big cash cushion, at least.

Then again, I never imagined interest rates would be held at 300-year lows for three years, even as inflation topped 5%. These are unusual times, and my actions have been adaptive (and not particularly astute – I’d have made money with a lot less volatility if I’d held a sensible amount of government bonds throughout, instead of dumping them too early on fears of a bubble).

I don’t recommend this lack of diversification, although equally I don’t think it’s a terrible idea in your 20s and 30s if you can take the gyrations (and assuming you’ve an emergency fund, and that equity markets look cheapish).

In my circumstances and with my unusual temperament it suits, but even I don’t want to be like this forever.

What I currently like apart from shares

When shares seem to be leaving the bargain basement, it’s commonsense for even an ultra-aggressive investor to consider shoring up on diversification.

But how? A few readers asked me as much via email.

I couldn’t tell them and I can’t tell you what you should do to follow me for two good reasons:

1) This is an educational website, not the diary of a guru. Read and ponder but don’t copy. Most readers will be best off with at least 90% of their money invested passively, rebalancing mechanically, not speculating.

2) The stock market fell, and so I’ve reinvested most of the free cash back into equities anyway!

With the FTSE now around 5,500 and the UK market on a P/E of 10 or so, I’m not quite so concerned about lightening up any further. I never thought UK shares looked dear, and now they’re cheaper again. Europe looks a steal.

Long may it last! The last thing I want is for the stock market to go up while I’m earning money and buying shares, especially when cash and bonds are paying a pittance. I owe a Greek politician a few Euros (or some drachma, soon enough).

Nevertheless, here are some of the choices I made or considered on the road to staying close to where I started, just in case you find them interesting.

Gilts

Dismissed as too expensive. I’ve been wrong about this before. The Accumulator has made a good case for holding your nose and government bonds regardless.

Index-linked NS&I certificates

I’d love more of these tax-free beauties, but as I warned when they last showed their face, they’ve proven more fleeting than an English summer. In current conditions I would buy these whenever they’re offered.

Cash savings account

The worst of times. You can get 3.5% in an ISA, but my annual allowance always goes immediately into the stocks and shares flavour.

Outside of an ISA, you can get over 4% if you lock your money away. But it’s taxed (and harder than on dividends or capital gains) so the net rate is unattractive. For emergencies only.

Peer-to-peer revisited

I’ve been a tad more active with Zopa recently: I got money away in the prime three-year market at on average close to 7% earlier this year.

Long-time readers may remember when I was spooked by a rash of bad debts. Apparently the Zopa risk machine was on the blink for a week in 2008; that clustering didn’t escalate, after all.

Furthermore, Zopa has made itself more attractive with the introduction of a Rapid Return facility enabling lenders to potentially close out most or all their loans – an option originally only given to borrowers. It’s not perfect or free, but it’s better than nothing.

I’ve also realised that as an early adopter I’m paying a lower fee of 0.5%, versus 1% for new members. I do like a perk!

On the other hand, Zopa long ago removed the one-year terms I used to prefer (and it is fiddling again with the length of terms).

Zopa has been running for about seven years now, and I feel that (as best we can tell from the outside) it’s proven it’s not going to blow up overnight. I’ll probably put more cash into Zopa in the months ahead, and may investigate other peer-to-peer platforms.

Remember though that being a Zopa lender is not the same thing as opening a cash savings account –the loans you make to individuals are more akin to a corporate bond, and you get no compensation from the FSA if a loan goes bad.

I may be over-cautious, but for this reason I don’t think I’ll ever go crazy here (so no more than around 5% of my net worth).

Corporate bonds

I feel investment grade corporates only look at all good value currently because gilts are so expensive. As for higher-yielders, junk bonds in the US just hit an all-time low.

If junk bond buyers are right about the prospects of the companies issuing their junk bonds, then I’d rather be in the shares.

Quixotically enough, I did put an order in for a slug of the latest Tesco Personal Finance corporate bond, which is paying 5% and runs for 8.5 years. This looks attractive to me, but for a specialist view check out the write-up on the excellent Fixed Income Investor.

It’s free2 to buy into these at launch, which helps. With no dealing costs or spreads I wouldn’t mind investing in a few such offerings from various top-tier companies at 5% or more and holding to maturity, to create a slightly risky mini-portfolio.

Lloyds preference shares

I sold my 2010 tranche of these non-payers; I own some beaten-up Lloyds shares, too, unfortunately, and wanted to cut exposure. I got out at just over breakeven (no thanks to the huge spread).

I would have done better to hold given that I bought back in earlier this year, and again more recently.

Lloyds’ recent results confirmed its intention to resume payment on these securities, and sure enough the LLPC shares I own just went ex-dividend.

I’m hopeful I’ve locked in a long-term yield of over 10% on purchase here, with the potential of capital gains to come, and all in an ISA. I’ve bought a meaningful amount, but I suspect I’ll wish I’d bought more.

They’re much riskier than traditional fixed interest and shouldn’t be considered an equivalent, but the potential rewards are far higher, too.

Tilt towards more defensive shares

Over the past couple of years, I’ve churned a particular portion of my active portfolio like a hedge fund manager rolling in a bathtub of his client’s money.

In this account, I’ve gradually favoured more defensive shares as the market rises – generally ones that pay a decent dividend – then switched back later into either an ETF or else risky shares on big dips.

In the turmoil of late 2011 I switched out of the likes of Unilever into riskier fair, for instance, then earlier this year I switched back.

That sounds more elegant than the reality.

I only do all this trading because I’m so overweight the stock market overall: I am prepared to pay for (the illusion of) more control. It’s not ideal on either a cost or returns basis, but because markets have gone sideways, I feel it’s paid off – not least because I’ve slept better at night.

Note though that the majority of my individual share portfolio wasn’t touched in the past year, except to defuse capital gains.

Gold / other commodities

Considered and rejected. I do retain a little physical gold with Bullion Vault, partly as an experiment, but it’s not a very meaningful amount.

I’ve actually softened my views on gold over the past few years. I do still think it’s a barbarous relic, as Keynes wrote, but I’ve decided at heart we’re all barbarians so gold will have its moments. I’ve no idea how to value it though.

This leaves me to look at charts, cross my fingers, and hope. I may start to trickle money in if it gets below $1,500. I’d only be looking to build a 1-3% position.

I’ve occasionally looked at various ways to buy into timber, which is a great long-term asset in a funk due to the US construction slump. Some trusts look very cheap in terms of the discount to their net assets, but the managers extract a pretty pound of flesh in fees.

Currently on the back burner, but timber may get some windfall cash.

‘Special situations’

These are a couple of shares that I’ve bought because I think something unusual is on offer that’s not closely correlated with the wider stock market.

US residential property

I would love to buy into the US housing market directly. I think it looks cheap, especially off the beaten track.

I’m too scared to fly to Florida to buy a couple of ‘condos’ with ‘no money down’, mainly because I’m afraid I’d get arrested for asking for that in the wrong place…

US listed REITs or housebuilders are an option, but we’re back to equity risk.

I’ve an American friend who I trust and respect, and who I’d consider buying with. But he’s a cautious fellow, and isn’t biting!

To be honest, this is flight-of-fancy stuff. I’m no natural landlord, and I still don’t own a UK home, with all the tax advantages, as I fear they’re still too expensive.

However if I were writing this blog as a native of most of America, I’d be out shopping for a house tomorrow.

  1. At one point in early 2009 I was selling physical possessions to buy shares! []
  2. My broker gets a half percent kickback from Tesco. []
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{ 13 comments… add one and remember nothing here is personal advice }
  • 1 Moneyman May 10, 2012, 9:23 am

    The perennial question – and you have been at this game for a while!
    One area you might think about is PIBS. There have been some unhappy episodes with them lately but think about this – as I understand it, regulatory changes mean that these will in future these will no longer counted as part of the minimum capital assets of the building society. So PIBS that might otherwise not have been called (because the follow-on rates are relatively low), may in fact be called as the BS would otherwise have to raise more capital.

    This is what helped to push me towards the Principaly PIBS:
    http://www.the-diy-income-investor.com/2012/04/portfolio-buy-principality-7-pibs.html

  • 2 The Investor May 10, 2012, 9:29 am

    @Moneyman — Thanks for your comments. I have looked briefly at PIBS now and then, but I don’t like the ‘special’ nature of their terms and conditions. I also recall the poor outcomes you relate, for what was once considered a fairly risk-free asset (rightly or wrongly). Most are also horribly illiquid in my experience.

    I am not dismissing them out of hand and would consider adding 1-2% to the overall mix, perhaps from either Nationwide or the Principality (I’ve been following the latter for a while via Fixed Income Investor), but so far I’ve found other things I like more.

  • 3 Mark May 10, 2012, 1:34 pm

    I’m in the same predicament as you, but not attempting to switch/time the market…and taking a beating for it! I too thought I had bought good value, but who knows! Crazy times right now.

    I read something interesting recently (can’t remember where) that said “you should find a bull market and invest in it” – great advice, but where is one? I’m struggling to answer that at the moment!

    Maybe it should be “find a tumbling market and short it”! Lot’s of choice there.

    I’m looking at commodities (ETC/ETF) currently, but apart from natural gas (massive over supply right now), nothing looks cheap to me so far. I think the long-term case is there for most commodities, but the volitility is scary. And as you say about gold, how do you value any commodity? It’s all about supply and demand, but still…

  • 4 The Investor May 10, 2012, 2:01 pm

    @Mark — I believe we’re in a bull market in shares still, and this is just a hiccup. As I hope I made clear in my article, I am and remain overwhelmingly committed to equities — over 90% of my net worth is still in shares in some form or another, though that will drop when my windfall cash hits the bottom line.

    I’m absolutely delighted to see shares drop like they have recently. My problems really start when the FTSE 100 hits 8,000 and the P/E is at 15, not if it hits 5,000 and the P/E gets below 10. The above moves are just the start of taking the foot off the ‘gas’.

    I’ve heard that quote too, and can’t remember who said it. Great if you can do it, and I’m not shy of active strategies as is pretty clear, but for most people it’s going to be a terrible strategy, of course. 🙂 Most retail investors pile into a hot sector far too late. (If I was a true trader and I was pressed I’d say long technology short commodities would have been my move in recent months, and for the next year or two at least. But I’m not!)

    Thanks for taking the time to comment.

  • 5 gadgetmind May 10, 2012, 2:23 pm

    I’m currently poking around with IT/REITs that have recently been bought by “brand name” investment houses in preparation for IFAs being more likely to promote such vehicles post RDR.

    For example, Schroders bought Invista Real Estate and renamed it Schroder Real Estate Investment trust, and Blackrock bought British Portfolio to create BRIG.

    The former has quite a few problems to address (hence 10% forward yield!) but they seem to have a grip on things, whereas BRIG has been re-invented as a fairly vanilla I&G trust but on a discount versus the premiums of many peers.

    Regards LLPC, my daughter flogged some of the tech shares she holds to use her CGT allowance for 12/13 and pumped the money into LLPC at around 92p. I’m hoping the dividend flow will cover most of her uni living expenses and that she’ll form the core of a house deposit afterwards.

  • 6 ermine May 10, 2012, 2:58 pm

    An interesting range of non-financial investments 😉

    It’s hard to know what to do with cash at the moment. As Yeats said

    The best lack all conviction, while the worst are full of passionate intensity

    There’s just not that much that really seems to be going anywhere, and too many proto-hazards to get any conviction. Faced with that sort of non-signal, even index investing starts to look attractive 😉

  • 7 Salis Grano May 11, 2012, 2:24 pm

    After a good spell a couple on months ago, rates on Zopa have softened recently. Also, I’ve picked up a couple more defaults (not, I hope the start of a rising tend) which have brought my effective return down to 5.3%. Not looking to put any more into it unless rates pick up.

    Proportionately, I have a lot more cash than you and, with equity markets fluctuating without trend, I’m mainly concentrating on keeping my “elephant gun” in good working order. Over the past few weeks I’ve had good news with IPR (takeover) and bad news wih COL (bankruptcy).

    Like you, I’m bullish on equities for the medium term, but I don’t feel like committing too much at the moment. Basically, I’m just waiting for the Eurozone to blow up (again).

  • 8 Lemondy May 11, 2012, 2:47 pm

    sub-2% YTM on 10 year gilts is insane. Guaranteed real terms loss. I have dropped from a 20% gilt allocation at the beginning of last year to a 6% allocation now.

  • 9 101 Centavos May 12, 2012, 12:23 pm

    Wise move on Florida. Being a long-distance property owner is risky enough for an involved landlord, let alone a reluctant one.

  • 10 The Investor May 12, 2012, 3:18 pm

    @ermine — As I suggest above, I’d be extraordinarily happy with the stock market not going anywhere from these valuations for at least 10-20 years provided company earnings kept growing over the period and dividend payouts followed. (Sadly I think that’s hugely unlikely, however).

    @Salis — Hasn’t it already blown up? The major European indices have fallen far more than the US or UK markets. (See Spain most today). Of course it could keep blowing up…

    @Lemondy — Hey! I always think of you when I write about gilts. “Guaranteed” is too strong for me, in that if I wrote it in an article a reader would rightly point out that in a decade of inflation, 2% might not look bad. But I think that’s not much more likely than me winning on the Premium Bonds (tough, given I don’t currently own any) so I concur. 🙂

    @101 Centavos — Yes, that sums up my thoughts. I’d consider investing alongside a trusted partner based in the US, though. REITs don’t seem an option unfortunately, as the single family home market is just getting off the ground when it comes to funds. The multi-unit REITs look fully priced already.

  • 11 Mosschops May 14, 2012, 7:43 pm

    I’ve been tempted by the Schroder REIT as well, but the debt figures have meant I have stayed away for the time being. I’ve been drip feeding into the Finsbury G&I IT mostly recently, as my last few share picks have been stinkers so I’m going to let Mr Train pick for me for a bit I think.

  • 12 Lemondy May 14, 2012, 9:01 pm

    You’re right about “guarantees”, of course… but a decade of deflation… with *this* Bank of England? I won’t take that bet. No way.

  • 13 gadgetmind May 15, 2012, 6:56 am

    SREI’s gearing is pretty average for a REIT, it’s their dividend cover that’s seriously lacking. However, even with a haircut, the dividend would still be good, and the discount to nav is *huge*. They also now have a good management team and have been making some sensible moves to get things sorted.

    Not one to use as the backbone of your property investments, but well into the “worth a few bob” category IMO.

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