Nearly ready to launch into the kinds of posts I was really intending to do for this series. But first a few notes.
A couple of people have asked about how I arrived at my asset allocation, so I thought I’d lay out what my thinking is. You’ll get different stories about what you should do depending on who you talk to, some people say you should have six months salary in cash available immediately, some that you should short sell the main market index when you leave college and gradually cover your position (the thinking here is that you have some human capital which will erode badly if the economy slows, so you want something to hedge that and shorting the market does that).
Some factors here are that I’m in a position where risk-taking is not deeply problematic, I’m single, without mortgage, and if worst comes to worst I have family I can run to. This doesn’t mean I’m taking insane risks but it does give me a bit more flexibility to take on more risk than most people can stand. This is, however, tempered by the fact that AIM stocks cannot be held in ISAs, so all of my (current) portfolio of stocks live on the main market.
As for selecting between cash, property and shares, that is in part driven by tax efficiency and in part by opportunity. Being to precious about keeping everything balanced too accurately will lead you into moving away from good perfomance investments to poor performers. It really doesn’t matter that much – because nobody can see the future well enough to say that any strategy will be better than any other – as long as theres a bit of diversity in there, ideally with low correlations. The share portfolio started as a ‘1000 pounds I could afford to lose’ gamble, which taught me enough about what it felt like to lose money that I figured I could deal with it.
So how to pick stocks? Well, I read Investors Chronicle, which is a tedious financial rag but which contains commentary on and summaries of company results. There are some things I’m looking for, a company that has rising turnover, rising profits and rising earnings per share (ideally for the last three or four years and with profits rising faster than turnover) will narrow down the list of candidates from the 40 or 50 companies they cover each week to a list of maybe three or four.
Each of these is then worth investigating a little more, quite often they already have a ridiculously high price-earnings ratio (anything above 20 is way too high), which means most of the coming upside is already built into the price. The next consideration is whether my current portfolio is already too heavy in their market sector, this wouldn’t necessarily prevent me buying but it is worth considering.
These companies then form a list of candidate shares – a lot of them will be rejected for some reason after reading the write up, those that are not are candidates for buying.
I tend to use a fixed amount to buy in, so all of the shares I own I bought the same ‘value’ of, subsequent moves have adjusted their weighting within my portfolio. Right now I have 1 ‘value’ available inside the ISA wrapper for spending on another company. This will be increased in December by another ‘value’ when the Amstrad special dividend arrives.
The danger of this strategy is that it has a tendancy to pick up five year cyclicals at the top of their cycle, which is why I’m a bit light on builders. And I don’t know whats going on in commodities at the moment, so I’m sitting out of mining and oil.