View the article online at http://citywire.co.uk/money/article/a645654
The smashing investment returns of a lucky fool
Citywire's Income Investor columnist has either found a perfect formula to make money on the stock market, or is merely a 'lucky fool'.
As the 2012 total return on my DIY Income Investor portfolio is heading towards 30% (excluding cash), I have to face a serious question: is this great result (well, great for me at least) because:
- I have found a perfect formula for making money on the stock market, or
- I am a Lucky Fool
And by Lucky Fool, I am referring to Black Swan author Nassim Nicholas Taleb’s definition:
'Lucky fools do not bear the slightest suspicion that they may be lucky fools - by definition, they do not know that they belong to such a category. They will act as if they deserve the money. The lucky fool [is] defined as a person who benefited from a disproportionate share of luck but attributes his success to some other, generally very precise, reason.' (Fooled by Randomness)
So, that’s me told, then. But maybe it is useful to try to unpick what has happened and what choices have led to this (possibly temporary) happy state of returns.
First, how have the benchmarks done? My portfolio is made up of:
- 50% high-yield UK dividend shares, drawn from the FTSE 250, including a few ‘legacy’ shares (that is a flattering term for ‘poor investments’) left over from the 2008 crash;
- 50% high-yield fixed-income securities, quoted on the London Stock Exchange and almost exclusively from the UK finance and insurance sector and consisting of corporate bonds, preference shares and PIBs (I sold my UK gilts during the year).
So, the appropriate benchmarks might be those related to:
- The UK FTSE 250: the iShares FTSE 250 (MDD) ETF is showing a year-to-date (ytd) of just over 23% (!)
- UK dividend shares: the iShares FTSE UK Dividend Plus (IUKD) - ytd return of just over 16%; and the SPDR S&P UK Dividend Aristocrats ETF - ytd return of nearly 6%
- UK corporate bonds: the iShares Markit iBoxx £ Corporate Bond (SLXX) - ytd return of just over 13%
- UK gilts: iShares FTSE UK All Stocks Gilt (IGLT) - ytd return of nearly 3% (only!)
Some surprises there, to me at least, particularly on corporate bonds, which I had assumed were in a bigger bubble than that! Still, apart from the good showing of the FTSE 250, there is still not a good explanation of the portfolio’s performance.
Taking again the key features of the portfolio and recent asset allocation decisions, there might be some other explanatory factors:
- The portfolio is almost exclusively UK-based, and the UK has at least avoided the Euro currency storm and the US election and ‘fiscal cliff’
- I made a conscious decision during last year to increase the share of fixed-income to 50% of my portfolio
- The portfolio is overweight in the financial and insurance sectors - both of which were heavily hit by the global financial crash
- I have bought ‘distressed’ high-yield fixed-income securities significantly below par - and have benefited from a change in market sentiment
- My ‘legacy shares’ - notably Lloyds (LLOY.L), Royal Bank of Scotland (RBS.L) and Barclays (BARC.L) have recovered significantly during the year (although remaining far below their purchase prices)
So what does this Lucky Fool take from this review? Well, I am sensible enough to realise that this performance is not sustainable - the continuing difficult economic times in the UK may mean an slide in my portfolio’s value in the coming years. And it is increasingly clear that my portfolio is not really as diversified geographically and sector-wise as it perhaps should be.
Perhaps it is time already to work on my New Year’s Resolutions.
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.
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Look up the shares
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- ishares FTSE UK Dividend Plus
- SPDR S&P UK Dividend Aristocrats ETF
- iShares Markit iBoxx £ Corporate Bond 1-5
- ishares FTSE UK All Stocks Gilt
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by Gavin Lumsden on Apr 23, 2014 at 09:00