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Income Investor: achieving returns of 27% can be plain sailing

Not having much to do much is one of the great advantages of investing for income, says our columnist.

 
Income Investor: achieving returns of 27% can be plain sailing

I used to sail, including across the Atlantic and down to Africa (from the UK). Sailing depends on the wind and the tides - and that is pretty unpredictable, although there are fairly reliable seasonal patterns. One of my most unsettling and surreal experiences was being becalmed on a mirror-smooth sea in the middle of the Atlantic. Becalmed and powerless.

Do you remember the song ‘Busy Doing Nothing’ as sung in 'A Connecticut Yankee in King Arthur's Court'? This is how I feel a lot of the time. As a responsible investor I feel that I should keep an eye on what is going on in the markets, following share prices, watching CNBC, reviewing the business news. As the song goes: ‘Hustle, bustle - and never a moment free’: and mostly to no particular purpose. The moral of the song is that mostly our intervention is not required.

Take your time

Not having much to do is one of the great advantages of being an Income Investor. Of course you do need to buy things once in a while but, as you are unlikely to sell them in the near future, it is worth taking your time. Warren Buffett has this line about imagining you could only buy 20 investments in your lifetime: that would encourage you to make sure that you made the best choices possible.

When you are sailing, you start by laying out a course to avoid the hazards and dangerous currents and maybe to visit some interesting ports along the way. You then keep track of where you are (this used to be with a sextant but it is almost too easy now with satnav).  The hard part is keeping to that course, night and day, bad weather and good - sometimes sitting in the cockpit in the dark and cold with the rain stinging your face and wondering what on earth you are doing there.

So it can be in the markets. My portfolio is currently showing a totally unexpected (and, I should add, uncharacteristic) near 27% total return since the beginning of the year: but with only four ‘buys’ and one ‘sale’. That’s around one major decision every two months.

Steady income

But while the market rises and falls, like the tide in the English Channel (although not as predictably), the income from the portfolio has remained virtually unchanged. This means that the yield has been falling, of course, but this stability of income provides a stable mooring point for my investment boat. The increase or decrease in the capital value is almost secondary, as I am not planning to sell.

This doesn’t mean that in 2008 and 2009 I wasn’t sitting there in my figurative cockpit wondering if I was really on the right investment course. Since then the portfolio has more than recovered, although there is still some water in the bilges to be pumped out.

Inevitably, as the cash builds up in my investment accounts I will have to do something with it (given the low returns). And yes, next year we might well be in for a correction in either bonds and equities. But hopefully my investment boat can ride through that stormy weather.

Anyway, I have to get back to work to decide what not to do next.

If you've enjoyed this article, why not visit DIY Income Investor's blog? The views in this article are the author's own, and do not constitute advice.

46 comments so far. Why not have your say?

Clive B

Nov 28, 2012 at 08:19

"My portfolio is currently showing a totally unexpected (and, I should add, uncharacteristic) near 27% total return since the beginning of the year: but with only four ‘buys’ and one ‘sale’."

OK, so 27% is very good, but I don't see it says anything about Income funds in particular.

e.g. I've got some money in the Cazenove UK Smaller Companies B fund - up 31% YTD. All that says to me is - sometimes we get lucky !

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Ranjith Withana

Nov 28, 2012 at 13:35

This is somewhat confusing!

Is the return for year.? What was the portfolio? Equity/funds? What were they and the period. I feel very genarlised articles like this without any relevant information for readers to check should not be published.

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an elder one

Nov 28, 2012 at 13:50

A bit of a pointless boast really; I've profitted but nothing like that; have a lot in commodities long term.

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Geoff N

Nov 28, 2012 at 17:21

This tells you nothing other than someone has made a near 27% return in one year.A complete waste of time!

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barry slater

Nov 28, 2012 at 17:27

What a waste of time read......next time feature a guy who lost 27 %

We would be just as wise !

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tony new

Nov 28, 2012 at 17:27

Don't you realise that you've just been very lucky this year?

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Nigel Coulthard

Nov 28, 2012 at 17:28

What on earth is the point of this article unless to lure readers in from the headline.

Tripe.

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Patrick Napier

Nov 28, 2012 at 17:33

As a sailor, you should to know that the word is PLANE sailing not plain!!

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Lost my marbles

Nov 28, 2012 at 17:37

Complete waste of space for all the above reasons.

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Dividend Income investor.com

Nov 28, 2012 at 17:40

I agree with the general tenure of this article. It is rather boring being a dividend income investor, but than again I have left my exciting investing years behind me; see: http://dividend-income-investor.com/about-steven-dotsch/

From a long term dividend income investor's perspective it is all about the price of purchase and the sustainability of a company's dividend, even, better the ability of such a company to sustain an increase in its dividend at least matching average inflation levels. Capital gain often follows.

Buy at the the wrong price, your returns will suffer.

Buy a company that is unable to sustain current dividends, your returns will suffer.

Buy at the wrong price a company that can't sustain its dividends, you are in the doghouse for a long time.

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Lawrence G

Nov 28, 2012 at 17:42

I disagree with those comments saying this blog post is not informative - it talks about following a particular approach and strategy, and the benefits of sticking to that.

Better in my opinion than the usual list of tips, next big things or fund ranking stats to follow in the hope of making a killing, which is not really a strategy at all.

The portfolio is detailed in the blog link for those interested.

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martin cragg

Nov 28, 2012 at 17:42

Why did you give this guy space to write such meaningless rubbish?

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Peter Wade

Nov 28, 2012 at 17:45

Now assuming Mr Income investor owned his own yacht and had gone from Sextant to SatNav / GPS he has probably been sailing for 30 years and had to spend the best part of £200,000 on owning a half decent second hand boat with appropriate equipment to sail to Africa. Pirate ransom, fuel, harbour dues etc and most important - maintenance at 10% of the value of the boat per year (an underestimate) is about £20,000 cash money per year .... so .... the maths is easy ...... the best investment he ever made was selling his boat!

I know

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Mark Taber

Nov 28, 2012 at 17:46

Fixed income securities, particularly the subordinated varieties of banks and building societies such as PIBS, preference shares, PSBs and ECNs are up considerably over the past few months. Readers may be interested in my analysis of whether this rally has run its course at:

http://www.fixedincomeinvestments.org.uk/fixed-interest-blog/howfarcanprefsgo

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john pearce

Nov 28, 2012 at 18:12

A complete waste of log-in time. You can do better - I hope!

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Tigga

Nov 28, 2012 at 18:12

Goodness knows how he managed to get 27% all I can assume is it is not in a year or he has a strange way of calculating. I have just looked at his blog and nothing has a return of over 10%.

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Daniel Prior

Nov 28, 2012 at 18:17

I've been switching over to mixed income and growth investment for a while using shares, funds and investment trustsand finnd the authors blog very helpul with his portfolio acting as a good basis for constructing my own. I'm at level six(ish) at the moment and contemplating corporate bonds though I do have some exposure through some funds.

My thanks to the author.

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Franco

Nov 28, 2012 at 19:14

Deceitful headlines, rubbish content, could not finish it.

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SamP

Nov 28, 2012 at 19:16

What a worthless article. How can this be published?

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B KROFCHAK

Nov 28, 2012 at 19:29

I agree

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Jonas Cord

Nov 28, 2012 at 19:50

Patrick Napier

'As a sailor, you should to know that the word is PLANE sailing not plain!!'

And you should know it's not 'you should to know' !!

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Patrick Napier

Nov 28, 2012 at 20:07

Touche!! I don't know how the "to" came in instead of "really" - honest!!

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CB

Nov 28, 2012 at 20:12

All I can say about this article is that it is media tripe, full of poetic anecdotes written by a second class journalist.

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Dave H

Nov 28, 2012 at 20:32

Tigga the portfolio on the blog is quoting the yield for each holding. He is claiming a total return (dividends + capital gains) of 27%. I don't see any info on the capital performance of individual holdings and there is no total return info for 2012. There looks to be a fair amount of fixed income (prefs/PIBS and the like) which have done very well this year, so 27% total return shouldn't be too hard. My own income portfolio is showing a total return of about 17% this year with a yield on present value of 4.8%. Not quite 27% but not so bad - but then my worst year was -35% which is better than his worst year.

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Hole Puncher

Nov 28, 2012 at 21:57

I like the article - a good reminder of what an income investor should do and shouldn't do.

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graham cribb

Nov 28, 2012 at 21:58

Actually Patrick Napier,plain sailing lS the correct terrm and derives from the old sailing ship expression "Under all plain sail" Planing is when a dinghy is sailing before a following wind which gives it sufficient speed to rise up and plane across the tops of the waves.

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Maverick

Nov 28, 2012 at 23:14

Er - trying hard not to be too geeky, but "Plane sailing" is a particular technical term nothing at all to do with planing : "'Plane sailing' is a simplified form of navigation, in which the surface of the sea is considered to be flat rather than curved, that is, on what mathematicians call a 'plane surface'. The plane method of approximation made the calculations of distance much easier than those of 'Mercator's sailing', in which the curvature of the earth was taken into account."

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Patrick Napier

Nov 28, 2012 at 23:16

Thank you,Graham. Local sailors use the term plane sailing to simplify navigation by treating the surface of the sea as a plane rather than the actual curved surface. I agree the differences have become blurred. Another example is underway when it should be underWEIGH becaused the anchor has been weighed. Us old seadogs like the old terms!!! We are also patient with our investments, try to spread the risks and not be too greedy. We don't always make good progress but hope to stay afloat!

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griffer

Nov 29, 2012 at 01:23

the discussion about sailing terms is more enlightening than the article..

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douglas gordon

Nov 29, 2012 at 05:00

I enjoyed reading the article. As an income investor myself, I could empathise with the author although I don't sail the seas.

I don't think the debate about sailing terms and suchlike belong here - this is an investment site. Reading the article was not a waste of time for me and, I think, for most thoughtful investors; but reading most of the negative comments have certainly been a waste of time for me.

Happy sailing Income Investor > with your investment strategy of course - I hope it doesn't take you off course! :)

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John Carroll

Nov 29, 2012 at 07:18

Was it Prince Philip who commented that owning a yacht was the equivalent of throwing ten pound notes continuously overboard - not unlike the stock market over the last few years for many investors. Regrettably as an ex day trader I include myself in that group.

To me there is some confusion. I get the sentiment by which he is activated but the comparison ends there. The conditions at sea cannot be predicted more than perhaps 72 hours ahead and in any one location. As a private pilot even 12 hours ahead can be a challenge.

With markets, variations on a daily/weekly basis are these days much more predictable and algorithmic trading is an absolute science not available to those less than the serious professional.

As every commentator here knows charting and snapshots on percentages can almost return anything you want.

Perhaps more detail would gain more support.

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dan cahill

Nov 29, 2012 at 08:34

I think the sea can be compared to the market and human's reaction to it.

The tides come and go and as King Canut demonstrated there is nothing anybody can do to stop this. However, one doesn't have to carried away by "investment tides" Just do the right thing and then wait. Your ship will come in one day - ouch.

I have really enjoyed the comments from the sailors who seem to know a bit more than many investment gurus! I will now go and "ease my springs" as I overindulged last night.

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Andrew Barwick

Nov 29, 2012 at 09:49

I've been surprised to discover that although the total return looks good, my income from the Ishares bond ETF (ticker SLXX) has not remained steady. Over the last 3 years the quarterly payments have been steadily decreasing.

Is this normal?

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steven fieldfare

Nov 29, 2012 at 09:56

The problem with moving from the safety of the shore with your investment accounts, because of the low tide, is risk that you will be unable to maintain fabulous trading success on following voyages, as the sands shift and hidden rocks show. Northern Rock was well disguised before the storm and that deepwater minefield put in place almost overnight by Blank and Daniels; also, ships that catch fire unexpectedly in far away places like the Gulf of Mexico and nearby natives who turn hostile to your trading efforts.

Surely, you will need to buy a secure onshore mansion and plantation with much of your gain (because they aren't making any more land until after the Mars voyages) and risk only a proportion of the gain in further trading adventures.

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MoneyObserver

Nov 29, 2012 at 11:55

What an insult of an article for the reader to have to endure !

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merchant_adventurer

Nov 29, 2012 at 12:23

Exceptional performance which should be applauded.

Although not quite as disciplined as yourself, I share a similar light touch view and find I have also undertaken just 5 trades this year (1 sale and 4 buys).

Purely co-incidence but I had a similar pattern of 1 sale and 4 buys last year as well.

Year to "today", my shares portfolio is up just 16%, but builds on last year's 11.5%, to give 29.62% on a cumulative 2 year view.

Prices, portfolio weightings, and transaction dates published monthly:

http://adventuresinequities.blogspot.co.uk/2012/11/october-2012-portfolio-update-long-haul.html

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Maxwell Gower

Nov 29, 2012 at 13:21

complete waste of my time reading such complete trash. I suggest renaming the artilce "How to fill a page without saying anything" . A suggestion to Citywire - take a lesson from this article. If your writers dont have anything worthwile to say, dont publish anything.

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Maverick

Nov 29, 2012 at 13:53

The article could simply have said "Buy-and-hold sometimes works - if you're lucky".

Other years buy-and-hold would have been a complete disaster. The dividends and interest would have produced an income of about 5%, while the underlying investments dropped in value by 15%.

That's not income, that's a loss.

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steven fieldfare

Nov 29, 2012 at 14:04

TY Maverick for saying more succintly what I thought .....and in less salty language!

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steven fieldfare

Nov 29, 2012 at 14:19

And everyone, please join me on "Fail to Prepare, Prepare to Fail" where I ran out of both wind and steam in an empty ocean of comment. It's the loneliness of the long distance saver.

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William Fowler

Dec 01, 2012 at 09:34

All that anything ever says is to spread your investments as widely as possible because, sure as hell, if something goes rocketing up one year it will almost certainly come rocketing all the way, or nearly all the way, back down next year. As befits a gambling den.

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Terry Harper

Dec 01, 2012 at 18:14

I don't see what all the fuss is about. I'm currently up 20.4% since January 1st this year. I'll admit to having done a little judicious reinvestment of accumulated dividends, taking some profit on WMH, and withdrawing some cash. The SP of WMH has risen by 66% this year, but then, LLOY has risen by almost 80%. That's in a 34-share portfolio. I'm sure that I am not alone in getting this result, and others may well have done better, by aiming for dividend income.

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Income Investor

Dec 03, 2012 at 08:40

(Author)

Thanks for the comments all. Some readers didn't like this at all and i suppose it was a bit 'poetic' - but the intention was to show how our life experiences can flavour our investment style.

No, I did not own the yachts: that would be silly!

As some commenters have noticed, the portfolio is detailed on the link. The 2012 total return has increased a little since the article was published.

By the way, the titles are usually added by the editorial staff...investing is hardly plain sailing - sometime more like running up the storm jib and heaving to.

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steven fieldfare

Dec 03, 2012 at 11:03

I tried to persuade others to join in with comment on a parallel article by Michelle "Fail to Prepare, Prepare to Fail" (find in Citywire search), where I remain becalmed in a lonely sea of comment.

It seems to me that there is a connection between investing for income and consumption. Whatever strategy is employed in investing for income in present times, returns are likely to be low or risks taken to achieve good results related in this article. The problem is that investment success may not be consistently repeated.

Consumption loses money, of course, essentially to eat and keep sheltered and warm; above that to safeguard health and achieve a high quality of life including freedom of movement and time. But it seems to me that income may be used to highly leveraged effect by equivalent focus on minimising consumption drain.

Some ideas are well known: "free" insulation to cut energy bills and the drive for efficient cars. But other philosophies are not so well recognised: the idea that quality furniture may be found at much less than full price and, if cared for, maintain or increase its trading value; or that a well chosen re-furbished washing machine does the same time relieving job as a shiny new one.

The point is that a similar amount of time and thought put into a total consumption strategy may produce in savings equal reward to that from income investing. Using both strategies in a co-ordinated and long term way promises exponential gain. What does everyone think?

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Income Investor

Dec 03, 2012 at 17:55

Steven

I absolutely agree with you - in fact I think, as you say, this is a logical extension of being an income investor and is a core part of the approach I advocate. On my website I have put a little bit about this but I didn't want to put people off too much:

http://www.the-diy-income-investor.com/2011/03/extreme-saving-50-things-not-to-buy-uk.html

I buy all electrical items refurbished; eat almost exclusively discounted food and get incredibly cheap cruises - plus all the usual cash-backs and best deals that the internet and comparison sites offer.

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steven fieldfare

Dec 03, 2012 at 20:27

Income Investor

Looked at the blog. Clearly there is a balance to be struck between time, cost and Quality of Life. Pointless wearing yourself out and enjoying nothing only to build up a large pile for ungrateful relatives or to fund premature care.

I guess the sophisticated trick (after scraping together an initial investment amount) is to match consumption spend with savings and investment targets, perhaps as ratios or proportions. If investment comes good, first call is to re-invest but to set aside some for Quality of Life improvement. But even here, there is a balance to be strived for: between expenditure that eases life and maintains social contact and morale; and "invested consumption" in stuff that might maintain or increase value eg a decent print for the wall rather than a picture from Boots.

But certainly at the beginning, as much income mght be derived from saving on consumption, as ever might be safely achieved from income investment in this environment - and probably at similar cost in time and effort. Less risky too.

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