I check my portfolio daily, although I know I’m not supposed to as I’m not trying to make money as a day trader, and apart from one stubbornly sluggish commercial property share, tipped by our editor after one too many gins at breakfast, I am greeted with a deep and satisfying sea of blue numbers.
I don’t pretend to take credit for this, obviously. With QE pumping vast oceans of liquidity into the market, and Comrade Gideon’s other pseudo-Keynesian schemes to underpin Britain’s lunatic house prices working like some kind of diabolical treat, stock markets have surged and carried my portfolio with them.
Glassy-eyed optimism is common at the moment. This worries me, really, not just because everything about that scenario – given the somewhat emaciated reality of our economic situation – suggests a looming crash to my superstitious mind, but also because it makes it harder to justify my next investment.
I am so used to investing into a downturn. This is the first time for a long while I’ve had to look at a market which has seen significant gains across the board and try to work out where I should be putting my money next.
But, with the best returns I can get from a bank or a cash ISA hovering somewhere around what the cobbler gave his wife, I have little choice but to look for an investment in the stock market.
It’s important, so the official line goes, to establish clear goals for an investment before you part with your cash, so let’s try that first.
It seems to me that this emphasis on "identifying your goals" is to some extent hogwash. My goal, like everybody else’s, is to make money out of my investment – as quickly as possible, although I realise that I may have to wait.
I do not own my own home because I remain convinced that house prices are ludicrous and, even if they don’t come down, I would prefer to rent a nice house indefinitely than buy a crap one that costs the best part of half a million quid and nails me to a debt I resent with every atom of my being.
I do have enough money saved to buy a house and no doubt my wife will make me do so eventually, but for the meantime around two-thirds of it is on deposit; the remainder, and any more that comes my way, is what I have to invest.
Earlier this week a stop-loss kicked in on one of my investments after it began to slip – the Aberdeen Asian Smaller Companies IT – allowing me to bail out at a nice profit, and leaving me with a couple of thousand pounds to invest somewhere else.
Performance of trust vs benchmark over 1yr
Source: FE Analytics
So, with a timescale of anywhere between two and five years for a return on my next investment – depending upon when my good lady’s patience runs out – where do I put it?
At this stage in the decision-making process, my attitude to risk is another of those sacred cows the industry gets so excited about, so let’s consider that.
I am generally risk-averse, I think. Well, somewhere around the middle. I want to see my investment grow, but it makes me deeply uncomfortable if I have to put up with significant volatility on the way.
I would much rather invest in a fund that delivers second-quartile returns over the short-term while others shoot the lights out, if I can rely on that fund to steadily deliver a positive return and – preferably – a dividend on a regular basis.
The final question I need to ask myself before I start looking for an investment, and in my view the most interesting one, is how will that investment fit with my existing portfolio?
I fully believe in diversification. It appeals to me as a sensible way to avoid putting one’s eggs in the same basket if nothing else, so any new addition must fit into my portfolio around – as opposed to on top of – my existing asset allocation.
Diversification is particularly important for me at this stage because I have no strong feelings about where the next growth area, in terms of asset class or geography, will be, so there is no imperative to pile into one area over another.
My portfolio as it stands today is split between two funds – M&G Index Linked Bond and Trojan Income – and three investment trusts – Caledonia, Fidelity Special Values and Jupiter European Opportunities.
My portfolio
| Trust | Weighting in portfolio |
|---|---|
| Caledonia Investments | 19% |
| Fidelity Special Values | 23% |
| Jupiter European Opportunities IT | 18% |
| M&G Index Linked Bond | 18% |
| Trojan Income | 22% |
Source: FE Analytics
I also have some shares in Lloyds, Northern Petroleum and Capital & Regional, but we’ll ignore those as I decided a long time ago (after watching HMV disintegrate and Lloyds disappear down into a bottomless hole) that I wouldn’t invest in direct equities again, and would sell out of those I hold when, or if ever, they passed the price I paid for them.
Using the portfolio analysis tools on FE Trustnet, a quick asset-allocation scan shows me that I am heavily exposed to equities, with more than 80 per cent of my portfolio in that direction, and 17.5 per cent in fixed interest.
This may seem aggressive for somebody who claims to be keeping his powder dry for that dreaded deposit, but remember the majority of my assets are in cash, so my investment portfolio is meant to be aggressive – a heavy exposure to bonds would be pointless, especially at current valuations.
The M&G bond fund I hold as a hedge against inflation. We are told that inflation is not a threat, but it doesn’t feel that way to me when I fill my car with petrol or buy a pint, and I think given the stimulus the Government has applied in various places, it must begin to come through at some point on the official figures.
The vast majority of my geographical exposure is towards the UK, at more than 60 per cent. My exposure to Asia is now virtually nil, as the Aberdeen Asian fund I referred to earlier has now gone, and my exposure to Europe – which I had thought was greater because of my holding in Jupiter European Opportunities – is only around 8 per cent.
On closer inspection, this is because the Jupiter trust currently has 30 per cent exposure to UK equities, which I wouldn’t have noticed without this scan.
Using the risk analysis tool in FE Trustnet’s portfolio system, I can see that my portfolio has an FE Risk Score of 67, which makes it considerably safer than the FTSE 100, so I think that gives me scope to up the risk a little.
So, where does that leave me?
Clearly, my exposure to the UK is perfectly adequate, and probably too heavy – it’s certainly higher than I want it, so another UK equity fund is not an option.
I have no interest in a straight bond fund. Like most people, I don’t see any value in corporate bonds at the moment, yields are paltry and with interest rates where they are, there’s not much scope for them in the future in my book.
That leaves Europe, the US or another investment in Asia, to replace the one I lost when the stop-loss kicked in, but what is driving equity prices in any of these regions at the moment?
I’m not a market forecaster, but it feels to me like equities all over the world are riding to some extent on the back of government stimulus in western economies, and the only reason markets are going up is because nobody can think of a reason why they should go down.
The situation on the average high street, and the real money I see in the pockets of the people around me, tells a different story – so I am caught between my fear of a castle built on sand, and missing out on a further rally.
Perhaps, then, I should hedge my bets with an absolute return fund – if I find one that actually works, it should fit well with what I want; a steady positive performance with limited volatility even though it may fall short of a more aggressive pure equity play.
Next week I’ll examine these options in more detail, looking at each of the potential regions and sectors that I think may make an attractive destination, and get some expert opinion to contribute to that debate.
In the meantime, I’m open to ideas. Where in the world do you see the recovery continuing, and what assets do you think will lead the way?
Please click here to tell me what you think.
