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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:

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 [3] 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:

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 [8] 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.

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:

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 [9], 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 [10], even if the rather high market P/E will limit how quickly it can race ahead.

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 [12] 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 [13] to get it).

Before the links, I’ll just add that if you missed Jacob’s guest post yesterday on living frugally [14], you should really check it out. I also posted about UK income tax [15], and introduced the Keynes versus Hayek [16] 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

Still alive after all those words? Want more? Subscribe [13] to get my weekly roundup every week.