Neil Hopcroft

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.

Currently I have three asset classes, in roughly equal measures: property, cash and shares.

I don’t own the flat I live in, mostly because I don’t anticipate staying for long enough for that to be worthwhile, this has been the case in most of the areas I’ve lived in. The property is a house in France owned with two others. This is currently being renovated. The house is roughly 25% funded by debt, which I’ve borrowed from a company I (mostly) own, I am recording its value as being the amount I have spent on it, this is perhaps not acurate but will be a good enough measure for the purposes of these discussions. I anticipate a further expenditure of 20% of the properties cost every year for renovation and improvement, this expenditure will be added to the ‘book value’ that I record.

Cash is mostly sheltered from tax by ISAs. This isn’t very exciting.

I have a portfolio of 16 shares, most of which I’ve held for more than a year now. These also live within an ISA. I intend to hold these until the time is right to sell them. There have been a couple of shares I’ve sold when the company changed from the company I was thinking I was investing in. The current companies are Amstrad, Castings, Charter, CareUK, Evolution, Goodwin, Helphire, Hornby, ICAP, nCipher, Premier Foods, Psion, RBOS, Spirax, SCS and Trifast. Some of these have done better than others – the best is up around 200%, the worst down around 40%, overall the portfolio is up around 20%, compared with cash which is up around 10% over a longer period. Of course the volatility of these shares is significantly higher than cash. This portfolio hasn’t had any rigorous allocation strategy or risk management thought – it has been more a case of finding shares I believe will do well and investing a reasonable amount in them, it has to be enough that dealing costs are easy to recoup.

This whole lot totals to less than a years salary, but it is positive. I have two bits of debt, both of which are covered by cash, they happen to be better run as debt than spending the cash (mostly this is more tax efficient) – a loan from my own company for part of the cost of the house and a credit card bill I forgot to pay this month (min payment covered by direct debit). The loan from the company needs to be repaid before June because there will be some tax implications if it isn’t.

So, this isn’t about getting out of debt….what is it about? Well, the aim is to get my finances in such an order that I can live off them without having to work full time – obvious not having to work at all would be great, but thats a bit further off. Perhaps the ‘not having to work full time’ actually means taking some months each year and living in the house in France. Right now I’m covering around 30% of a months salary per year in passive income – this is clearly nowhere near independence.

This is the first entry of my whitterings about finance – you are able to see this because you volunteered to be on this filter, if that isn’t what you wanted let me know and I’ll change it.

Some ground rules:

– this is writing by an amateur, nothing here constitutes advice
– I’ll mark everything using this filter and a tag (if I remember)
– nothing here is private, the reason its filtered is because I know that not everybody wants to hear about it, there won’t be juicy details like salaries or values of debts, everything will be written in terms of percentages
– the intention is that all these filtered posts get made public at some point in the future, the point is not to make the information private, but to prevent annoying those who don’t want to hear about it
– a lot of what I’ll write here is going to be notes to myself, its as much about finding out how well I’m doing, how good my analysis is and how to improve it as it is about sharing this information
– most of what I’ll write will be about the stock market, but there’ll be some other things sometimes
– feedback is encouraged, I’m not pretending I know everything (anything)

…I’ve got a few bits of background to go through, about what my current state is and where I think I’m heading, but they’re going to have to wait for another day.