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

Weekend reading

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:

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

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

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{ 20 comments… add one }
  • 1 Money Reasons April 17, 2010, 3:02 pm

    Thanks for the mention! Loved that “Keynes versus Hayek” video!!!

    I like the point you make about financial advisors giving advice in 2009 that was wrong, and then letting the issue fade.

    I still remember when Suze Orman (who I watch occasionally) was telling people to get out of investments and put their money in cash. Unfortunately, this was the wrong advice to give, because of the great rally from the low in 2009. I respect Suze, and I think she give pretty good advice for the masses, but she shouldn’t be giving stock market timing advice… It’s obviously not her forte.

    Great insight! I’ve been thinking of rebalancing my portfolio so I don’t have as much money on the line in equities too. 🙂

  • 2 RetirementInvestingToday April 17, 2010, 5:17 pm

    Great post. The valuation method that I use which is based on the cyclically adjusted PE is suggesting the S&P 500 is now 32% over valued and is above the 80th percentile of historic valuations.

    This is therefore also forcing me to reduce my exposure to equities via my tactical asset allocations. I haven’t yet sold anything but have been reducing by:
    – taking dividends off the table
    – contributing no new money (other than a very small amount via pension contributions) to the stock markets. New money is a considerable portion of my total assets as I’m working on retirement in around 7 years from today.

    One note is that you say you have no exposure to pensions. Around 1/3 of my net worth is held in this tax deferral shelter. I’d be interested to know why do you choose not to have a pension? Have you run the numbers and they don’t work or you just don’t trust government? For me I just can’t ignore them as I mentioned here http://retirementinvestingtoday.blogspot.com/2010/03/are-pensions-good-retirement-planning_07.html

    You also say you have no bonds. Have you considered Index Linked Savings Certificates? As a 40% tax payer these IMO are working well for me as at least I can get a return after inflation and tax which is currently impossible with my cash holdings. I have about 20% of my net worth in them.

    Finally, agree with you on over priced houses. I’m also currently renting and with IMO the government currently intent on keeping them there at the expense of the country in general I also can see myself renting for a while yet. Not sure the next lot (if we get someone new) is going to be any better either.
    .-= RetirementInvestingToday on: US (S&P 500) stock market including the cyclically adjusted price earnings ratio (PE10 or CAPE) – April 2010 Update =-.

  • 3 Simple in France April 17, 2010, 7:12 pm

    I think you make a great point when you say it’s important to mention how much (or what percent of a person’s net worth) is being invested when bloggers talk about investments. I could talk about our more volatile investments but it only represents something like 1/5th of our net worth . . .and even those would probably make most of those who enjoy investing yawn with boredom.

    As for buying a home in the UK–when we lived in the Silicon Valley we were also dead set against it and are now very glad. But I know that feeling: thinking that housing prices for rent and purchase are likely to keep inflating faster than the rest and wondering how you can get an investment to keep up. I don’t know too much about he housing marked in the UK, but I always envision it as being ridiculously expensive.
    .-= Simple in France on: How do you chose a ‘new’ car? =-.

  • 4 ermine April 17, 2010, 8:22 pm

    What scares me, is some of what is coming down the line over the next ten years. I feel a veritable crapstorm coming in:

    possibility of oil production peaking

    even if that isn’t the case, the economic rise of China and India meaning the power shifts, plus a dramatic increase in demand for oil. These countries have young upwardly mobile demographics, they’ll want to drive to work not ride bikes.

    unwinding of personal debts in this country

    the baby boomers retiring, unwinding their stock positions to live on thus turning into net sellers

    The UK housing market is nuts. You need interest rates to rise, to force many of those who withdrew equity from their homes out onto the street because they can’t service the mortgage. The forced sales will lower prices. You have capital, which is a very rare thing in the UK, and it will be king when rates rise. Don’t buy in an overvalued market – I did that and had to eat a 40% loss 10 years later. When I plug my 1988 earnings and house price into Priced Out’s calculator it comes out with the same rebased answer as the value of a similar two-up-two-down today.
    .-= ermine on: It’s still lovely and quiet out there with no jet aeroplane noise =-.

  • 5 OldPro April 18, 2010, 1:11 am

    Not bad at all old son – if was the old days your 4x income Net Worth would buy you the average house (3x income) mortgage-free with a nice pot to grow for your grey days leftover.

    These are the days of the 5x/6x/10x average house prices – bad news for latecomers unless there’s an upset. Would cross my fingers for you but then I’d do myself in the nads!

  • 6 LeanLifeCoach April 18, 2010, 2:13 am

    Investor: I appreciate the mention. I just enjoyed catching up after too many days away. The Keynes versus Hayek video was too cool. I can’t say I’ve spent a lot of time studying either one. However, it seems to me that if we all followed Hayek and saved like the Chinese, we would experience some short-term pain while nobody spent. Long-term wouldn’t we eventually all have enough to make the engine of economics run efficiently. .
    .-= LeanLifeCoach on: Work Life Balance, A New Definition =-.

  • 7 Barb Friedberg April 18, 2010, 2:43 am

    Hi Monevator,
    I found you over at Len Penzo dot com. I enjoyed the post. Since you are young, being heavily invested in stocks is a good way to grow your portfolio and let time and compound returns work their magic. Good luck!

  • 8 Faustus April 18, 2010, 5:56 pm

    The overinflated housing situation is a P.I.T.A. for almost all of us under 40 in the southern UK. I suppose we just have to take the same approach as we do with equities – i.e. patience is a virtue. In the long run reasonable value will have to return, but it may be 5-10 years away. And by staying out of the market we may be helping those values to return sooner rather than later.

  • 9 George April 19, 2010, 1:29 am

    “Academics have proven you’re best investing regularly into an index tracker, ideally as part of a mix of different assets for safety.”

    I still have lots of doubt about this as an individual investor who’s beaten the market over the past 5, 10, & 13 years (pity I didn’t save my records from 1993-1997).

    I think the correct statement should be “academics have proven managed funds don’t outperform index funds”. And that’s because all funds have to meet liquidity requirements as investors put their money in and take it out of any particular fund. If you’re trying to run a managed fund, then how can you possibly do it while someone’s taking away your chips or throwing them in the pile at the exact wrong moments?

  • 10 The Investor April 19, 2010, 10:00 am

    George, my record is similar, over a shorter period of active investing – largely because of moving money in and out of the markets, for all I fiddle with stocks and asset allocation! 😉

    The trouble is as a commentator, I don’t want to encourage people to go down this route because the evidence *is* that private investors who attempt to market time and trade fail.

    I cited how increasing trading has been proven to reduce returns for most in my post singing the praises of boring brokers. And this post explains how market timing reduces returns for most investors who miss the big gains after steep falls.

    I agree your rephrasing is more elegant — but I do think most people should just trickle money into index funds. This latest bear market has done nothing to persuade me that the average investor is any better at timing markets than reading star signs… just look at the bulletin boards which are littered with people selling up and buying gold in March 2009 etc.

    It’s a real dilemma for the blog. I want Monevator to be a useful resource, not more noise leading private investors astray. Yet as this post proves, I don’t at all follow an all-passive, market ignorant strategy myself.

    Established readers may understand this, but newer readers can be confused (see the recent comments from a new investor on my ETF portfolio post).

    Not sure how to resolve this – Stock Tickle was and may still be part of the solution, but I’ve yet to even write-up my demo trading portfolio there! And it seems wrong to not mention my own experiences on a blog, when blogs are so based around honesty and candor.

    Cheers for stopping by and commenting!

  • 11 The Investor April 19, 2010, 10:08 am

    @Faustus – A fellow traveler! As I’ve written before, I elected not to buy a flat in 2003/4, when London P/E ratios and P/rent ratios were already stretched against historical norms. Seven years later, they still are – and property is much dearer. Personally I wish I’d bought with the masses in retrospect, but having played my hand I may as well see how it unfolds, and renting is so cheap compared to buying I’m not too bothered.

  • 12 The Investor April 19, 2010, 10:10 am

    @Barb – Nice to be called young in my mid-30s (seriously, I know it is when it comes to investing 🙂 )

  • 13 The Investor April 19, 2010, 10:13 am

    @OldPro – Do you know, I’d never really thought about my net worth versus historical housing that way?

    When I do tend to think of my net worth and housing, it’s with a wry smile that I could have bought more than one of the London flats I first looked at in the mid-late 1990s outright at the price then with the cash I now have. I think that’s pretty shocking when you consider earnings are only up c.40-50% (from memory) and the stock market is still at pre-2000 levels.

    Thanks for the pep talk!

  • 14 The Investor April 19, 2010, 10:15 am

    @Ermine – Thanks for sharing your candid experiences from the last crash. I must admit I’m getting sick of waiting for this bubble to pop; I’m minded to think the experience of the early 1990s means Governments will now do anything to avoid a housing crash (including changing inflation targets etc) but starting from this point I don’t think I’ve much to lose by continuing to wait. The rest is a sunk cost! 😉

    As for the doom ahead, well, there’s always doom ahead. The public sector deficit (and pension situation) is awful, but it’s the environmental issues that concern me most. We have to invest in the world we have though – and arguably the markets have seen worse.

  • 15 The Investor April 19, 2010, 10:16 am

    @France – Thanks, and yes, it’s not easy. The big kicker is leverage. I’ve saved up and compounded to add to my net worth pretty smartly since 2000 – faster than house price rises since then. But without an 80% mortgage doing the heavy lifting, it’s like chasing the tide.

  • 16 The Investor April 19, 2010, 10:20 am

    @RIT – I’ve got to say I’m still broadly positive about the markets, even in the short-to-medium term. My decision is as more about taking money off the table for the preservation of that potential house buying fund as it a call on the current market valuation, although I agree it’s not dead cheap right now.

    I do sometimes look at National Insurance certificates, but the multi-year lock-in isn’t particularly attractive given my house situation (though I recall you can get money out if you have to, it’s with a big loss of interest). Trying to decide where to put my cash may prompt me in that direction though – I can’t find better than 2.75% outside of an ISA at present (and my ISAs are full of shares).

    Re: Pensions and ISAs – I’ll knock you up a post! (I’ve been working on one for a while, and it’ll be a good kick up the backside to finish it!)

  • 17 The Investor April 19, 2010, 10:22 am

    @LLC – Yes, Keynes’ Paradox of Thrift is entirely the problem with Europe, too. The Germans are urging Southern Europe to be German, but Eurozone interest rates were partly so low (causing those crazy Mediterreans to Spend Spend Spend) because of German savings and austerity!

  • 18 The Investor April 19, 2010, 10:24 am

    @MoneyReasons – Thanks for the thoughts. I wouldn’t be too hard on old Suze, in as much as we all make poor calls. Or rather it depends how you phrase them. I was putting money into the markets while it was still falling in 2008 and wrote about it, but hopefully I did it in such a way that stressed I didn’t *expect* or need to see a turnaround for years.

    It’s best to be humble, which is why I’m taking some money off the table after this crazy 12-month surge.

  • 19 roym April 20, 2010, 10:37 am

    do you mind me asking what tracker funds you use?
    i have several managed funds with fidelity (USA, japan, brics, nat resources, UK cautious, UK recovery & absolute return) and was wondering if i should swap them? also recently bought into 2 etfs (brics and european dividend) from ishares but am confusing myself even further!

  • 20 The Investor April 21, 2010, 9:16 am

    @roym – I use tracker funds from Legal and General, plus a variety of ETFs from iShares. I have held the L&G funds (within ISAs) since 2003, and am quite happy with them. They’re not the cheapest (I think Fidelity Moneybuilder is, or the new Vanguard ones if you can access them) but they’re not very dear, with the UK All Share tracker coming at 0.65% from memory, including trading costs etc, which is okay for a UK tracker fund. (Americans get theirs much cheaper).

    I particularly like them because they offer a neat fund free-switching ability, which means I can rebalance/tinker with my country/currency allocations from time to time, as outlined in this post:

    Because I tinker with aspects of my portfolio, I’m not hell bent on shaving the last 0.1% off my tracker charges. Cheap does me fine. If all you do is a tracker, then you may as well focus on cost because that’s all you’ve left to occupy you! 😉

    Be careful with that European dividend iShares trust. The iShares dividend plays are very volatile, with both income and capital, and should not be confused with a normal tracker or income investment trust. Not saying it won’t do well, but be sure you know what it’s meant to do for you.

    Finally, make sure you’re not paying higher fees by overlapping choices.

    Let’s say a tracker costs 0.65% a year, but a managed UK cautious fund and a UK recovery fund both cost 1.65% a year. I’d suggest the holdings of both added together pretty much amounts to a tracker (the cautious fund will have defensives, adn the recovery riskier cyclicals etc) for which you’re paying an extra 1% to hold. There’s no point in my view in this sort of thing.

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