Diworsification and the Twitter Effect

It seems that Twitter uptake may have reached saturation point. Apparently the user count has stayed flat since the start of the year. Not good news for a social media service which bases popularity on pure numbers (as in number of followers, the "I follow you, you follow me" syndrome).

I do use Twitter but, I admit, not in the most "Twitter-ish" way. In other words I don't put any effort into boosting my followers and I "mix-up" my interests in the same account (some of my political re-tweets must drive my FI followers mad - if they ever read them, more of this below). In other words, I follow who I'm interested in and I tweet what I'm interested in. I only access my timeline about once a day - more often if there is a breaking news story that I'm curious about as I find it particularly useful for up to the minute information and opinion, and I don't tweet on anything like a regular basis.

Another interesting article about Twitter this week mentions a further effect that comes into play when it is used in the conventional way - i.e. the way aimed at gaining you the most followers by following lots of people yourself  - and that is a situation arises such that:

"genuinely tending to the tweets of more than 200 people becomes impractical (and unenjoyable) ..... with everyone sending out tweets few people have the time or energy to read or act upon." (Andrew Smith)

Over-enthusiastic "following" which is part of the essence of proactive Twitter usage, means you are less likely to actually see the quality tweets that you are really interested in, because your time-line will be full of stuff you're not really interested in .

 In many ways this emphasis on quantity rather than quality reminds me of the investing sin of diworsification - i.e. holding so many funds/stocks that any inherent quality/value in the portfolio is lost or watered down by the fact that it makes up such a small part of the whole.

The subject of this week's Portfolio Clinic in Investor's Chronicle is a case in point. The investor holds 46 funds, and as the commentators point out, he may as well be holding a global index fund at far less cost and trouble. But also, as with the Twitter "too much noise" effect any quality brought to his portfolio by actively choosing funds is drowned out by, and buried in, the quantity of assets he owns.

"46 is far too many. Apart from being a large number to manage, research and review, there is the potential for overdiversification or 'diworsification' - where a portfolio is spread so thinly that any outperformance is too small to be noticeable." (Danny Cox).

The obvious answer for us ordinary investors to the issue of diversification in equities is, of course, to hold a global tracker and not to look at it too often. This incidentally is also perfect advice for the ordinary Twitter user (celebrities excluded) who is determined to get their follower count as high as possible. Follow everyone, (if you're really dedicated to the task you can even use software to do the job for you) and don't even try to asses the quality of what they say. Trying to mix quality with quantity in either stocks or Twitter is a self-defeating exercise.

May 2015 Update

I have decided to change the format of my portfolio update this month due to the fact I'm probably going to shift some of it down into cash in the next 2 years rather than leave our ISAs fully invested and use them to draw income. This means that the "big picture" is what is important so I am going to be recording our portfolio as a whole, which includes my LGPS AVC's (but not my DB pension itself) and our cash accounts.

I have done a "best guess" on what might need to happen over the next 6 - 9 months due to the fact that we might need to pay around £7,500 in tuition fees and gift both sons £5,000  each; the eldest to help with living expenses for the period and the youngest to add to his savings. The younger one is quite happy to leave the remainder of his gift with us as at the moment.

I am hoping to limit the move to cash to what we will actually need, as it's looking more and more hopeful that VR next April is on the cards. A little investigation into the pension rules and asking a few questions has revealed that giving access to my pension unreduced could well be part of the deal. The most likely scenario seems to be that I would be let go on "efficiency" grounds which would mean that I would have access to the pension but no redundancy money. Although that would reduce my cash "hand out" it would be a far superior long term result from my point of view and I would still receive cash in the form of my LGPS TFLS (£13,600), my LGPS AVCs (around £4,500) and a TFLS from my SIPP (£8,500) which gives me £26,600. This should be more than enough cash to gift a further £5,000 to the eldest son and put the £12,500 away in an ISA for the youngest (or whatever he thinks best).

I should know by the Autumn if VR is going to happen so at the moment I'm trying to do as little as possible, but as much as possible, to secure the cash and avoid having to sell equities at a low point. As there are two legacy funds in our ISA's that I would not buy if I were starting with a clean slate this is where I intend to start selling. The funds are CIS UK Growth and CIS UK Income and Growth. Both have actually done quite well over the last year or so and are currently near (or in) the top quartile for funds of their type. Although the fees are high at 1.5% Interactive Investor has been refunding half of this so I have been happy to hang onto them as part of our UK exposure. But, as we now need cash I think it's time, or very close to time, to sell. The likelihood of a wobbly UK market due to the prospect of an EU referendum only strengthens my feeling that this is the best move to make. Between them the two funds will raise just over £10,000 and so, along with the cash in our Santander account, should give us the cash buffer we (might) need for the next 9 months.

I know selling a big chunk of our UK stock like this will completely skew my asset allocations but I will have to think about rebalancing once there is a clearer picture of our whole financial situation. At the moment there are far too many unknowns, so doing what seems best at the time is as good a plan as any. :-)

January 2015 Update

January's update is here

The format for my portfolio updates last year was clunky and messy so I've tried to simplify things but retain the information. This year is pretty key in my plans as it will be the last chance I have to boost our ISAs and my SIPP before my husband retires and we're living on a much reduced budget.

ISAs

I've gone a fair way towards balancing my ISA according to my asset allocation strategy, but I have yet to tackle my husbands which is still very top heavy in the two CIS funds. My aim for the ISAs is to provide £2000 - £3000 pa  income during the years before my LGPS becomes payable (hopefully starting in 2 years time when I would like to retire). I know that I am not "sticking to the rules" by having a fairly aggressive growth strategy when we may want to draw an income so soon, but we both have DB pensions that will be adequate when they are in payment so I am not intending to draw on the ISA capital until (and unless) we need to do so to pay for care costs in the future. A short term/long term/terminal (god forbid!) drop in capital wouldn't overly affect our ongoing standard of living.

• To achieve my target I'm aiming for at least £70,000 in the combined funds by March 2017.

SIPP

My SIPP needs to provide us with an average income of £7,060 pa (tax free) between March 2017 and March 2024 when I will be able to access my LGPS pension. Because this income is key to maintaining our standard of living throughout these years I am aware that I need to concentrate on hanging onto capital. The SIPP should therefore be invested quite differently from the ISAs. I'm not sure that I've got this quite right just yet (especially given the fact that I have an All World Equity Tracker in there :-)). This is a work in progress, (Any comments very welcome).

• To achieve my target I'm aiming for at least £50,000 in this pot by March 2017

Summary Jan 2015
Total Funds Outstanding £25,520.34

(p.s I'm very interested in the progress of the portfolios of my fellow bloggers so this year I will be adding links to any updates as I come across them. If anyone would like theirs including please add a comment, likewise if I've tracked you but you would prefer not to be included.)

December 2014 Update

December's update is here.

The running total for my savings and investments for the year  is over £19,000 which feels like something of an achievement. :-) (Although some of this is down to the fact that I now know exactly what we've got whereas previously the figures were quite hazy). Let's hope 2015 goes just as well.

Next year I intend to try to spilt out my pensions from my ISA and record them separately. They have very different purposes and time scales, so I'm coming to realise that it isn't helpful to combine them for asset allocation purposes.

All in all I'm very pleased with how things have gone since March when I first started to actively manage my savings and investments with the goal of joining my husband as soon as possible after he retires in 2015. I have no intention of struggling out to work for another 11 years until my pension becomes payable at 66. Those years are precious and my job is not as satisfying as it once was.

It has been a steep (but enjoyable) learning curve. Our ISAs are finally sitting with a low cost broker where they can be managed easily online, I am now paying into a SIPP to help fund the years before I can access my LGPS pension, we have started to manage our rental property ourselves for a fraction of the cost and well defined targets have been set and a clear asset allocation devised. It has been a very productive year.

I started this blog to record my progress towards early retirement and entertain myself along the way. What I didn't expect was the extra bonus of the support, sympathy and good advice from fellow bloggers and readers along the way. Much appreciated. :-)

I would just like to take this opportunity to say thank you to everyone out there and wish you a very, very Happy New Year.

Should I Buy Commodities?

I currently have around £4,200 sitting as cash in my S&S ISA which I'm looking to re-allocate and now seems a pretty good time to do it. My portfolio doesn't hold any commodity shares directly, only via the exposure I have via my general equity funds, so this is an area I could potentially use for a little further diversification.

In addition some of the bloggers I read are currently buying commodities - or waiting for the funds so that they can do so, so this does seem to be where the sensible (and knowledgeable) money is going at this point in time. However I'm anything but knowledgeable regarding this kind of asset and I know I shouldn't be buying anything I don't understand. The main question I have being why are the stocks currently so cheap and what is likely to have an influence on their price in the future.

So I did a little research and  reading which was more than a little depressing about the current state of the global economy and the part played by the price of the raw materials needed to build growth, but which did suggest that buying now would quite likely be a good move. That's so long as growth does pick up next year and doesn't halt completely, in which case no-one would be needing the raw materials needed to build, or make anything. However the WTO is cautiously forecasting a rebound next year which gave me the confidence I needed to think about this further.

So what to buy? I was tempted by Billlton as the research done by other bloggers is very convincing (thanks especially to FI UK on Financial Independance UK and Huw on Financially Free by 40)  but I haven't yet taken the plunge and bought any shares in individual companies and I'm not sure that doing so is the way I want to go at the moment, so I decided to look for a more general access point. Following up a comment made by diy Investor UK on Huw's post (thanks again) I took a look at a couple of investment funds - Blackrock Commodities Income with a yield of  7.25%, trading at premium to NAV of 4.9, charges 1.08% and BlackRock World Mining which is trading at a discount to nav of -7.55% with a yield of 7.20% and charges of 1.42% (and which incidentally has almost 10% invested in Billiton).

What about the passive choice of a tracker/ETF? I did find a Global DB-X tracker  available at 0.45% charges inside my ISA on Interactive Investor which might do the job - far less volatility than the Investment Trusts and with lower charges but 0% dividend yield and it hasn't done at all well when compared to the sector over the last 3 years. I'm afraid I wasn't tempted.

My decision - I'm going to take a risk and go with the Blackrock Mining Investment Trust. My reasoning being that it is trading at a good discount, the fund managers have been around for a long time and so have a lot of experience in the area and, although it has had a bad year, according to MoneyObserver and  some other sources, this blip is due to a particular set of circumstances and is not likely to be terminal. The high charges are a bit of a downer, but I have also read that they may be reduced in an attempt to lure investors back in and the yield at 7.20% does a fair bit to offset them.

Decision made. I've just bought £1,500. Let's see how things go.

November 2014 Update

November update here.

It was good to see the bounce back this month as all that red was looking a little depressing.

I have been practising a little market timing, hanging on and waiting to sell another £10,000 of my CIS UK Growth fund until it came back up to the price that it has been hovering around for most of the year. This fund has beaten the UK All Share index over the last 3 years so it does feel a little strange to be cutting down on it, but my portfolio is so unbalanced and having so much in one UK based fund is not such a good idea so I went ahead with my plan and sold when the price was right.

I must admit that I struggled with what to spend the money on. I read up on where those in the know (is there such a thing?) think the value is and the consensus seems to be that Europe, Japan, emerging markets (and to some extent the UK) are not over expensive so I split the money between my trackers and Investment Trusts in those areas. (ermine has just put up a great post on this subject which confirmed what I had gone with which cheered me up). I also put another £1000 into my Global Clean Energy tracker.

However, I didn't manage to re-distribute all the money and still have £3,000 sitting there in cash which I need to do something with. I've missed the 23rd of the month which is Interactive Investor's day for regular payments when trades only cost £1.50 and I only have £12 commission credit left, so I'm loath to pay £10 per trade and spread it around. This means I either have to put it all in one place or leave it till next month when inspiration might have hit about what to buy.

I've still got very cold feet about a US tracker which is what my masterplan says I should be buying but maybe I really did ought to bite the bullet on this - see below for current asset allocation which still looks very unbalanced in favour of the UK despite the fact that I've halved my UK Growth fund and been buying elsewhere. Must try harder :-)

Asset Classes	Total(%)
UK Equities	34.3
Money Market	18.8
UK Corporate Fixed Interest	7
US Equities	4.9
Property Shares	3.6
Europe ex UK Equities	2.1
Japanese Equities	1.9
Commodity & Energy	1.9
German Equities	1
Other Holdings	24.5

In Anticipation .....

I received a secure message from Interactive Investor 10 days ago telling me that my ISA transfer would be showing in my account in 3 days time. Despite several phone calls my funds still haven't arrived, although I am assured that this is just due to a backlog and they will be with me very shortly.

I know (from reading the numerous posts on the subject on moneysavingexpert.com) that all the platforms are struggling with the volume of transfers at the moment. II is one of the better value flat rate services and so I appreciate that it is probably struggling more than most. I am (and I have been) prepared to wait but it is quite disconcerting to get an automated mail saying that your transfer is finalised, hold onto your hat, you'll be able to trade very soon, and then..... nothing.

However, in the meantime, I thought I should some concrete plans about what I'm actually going to do when the magic moment finally arrives.

My transfer will consist mainly of the CIS UK Growth Fund (around £40,000 on a good day) and a tiny bit of the CIS US Equities Fund (£70 - somehow a bit got left behind when I sold most of it a few years ago).

Due to the UK fund being by far my biggest holding my portfolio is very top-heavy in UK equities and I know that I need to rebalance. However I do need to watch out for dealing charges. Interactive Investor charge £10 per buy/sell but I will be credited with a total of £50 credit plus £20 cash when the transfer completes due to the quarterly credit plus transfer offer. So I will have £70 to spend over the next 3 months which also needs to cover 3 lots of monthly investments at £1.50 per line.

My first priority is to sell a good chunk of the CIS UK fund - I'm was thinking that I would sell £10,000 and redistribute it into my trackers as a start. So something like £3,000 into BlackRock Emerging Markets, £3,000 into HSBC FTSE 250 and £4,000 into HSBC European Tracker. Well at least this was my intention until I saw this:

(Telegraph 26 Oct 2013 - Dan Hyde) 

This article has made me question my plans because it seems that (if the analysis is to be trusted) the areas in which I have already bought trackers are actually the areas where, if I'm going to use active funds at all, I should be using them. It seems that somehow I may have got it completely the wrong way round. Until you look at the effect of the fees of course :-)

One thing I can be clear on is that I do need to put a fair bit of money into the US as I have very little exposure to the US markets at the moment (around 4%). But this is such an expensive area as the S&P is soaring. I would be buying very high.

Perhaps a global tracker would be a better idea that a US specific fund at this point in time (I do also have an ex-UK tracker in my AVC fund). In this way I cover both the US and Europe and can beef up either/both when the markets fall a little. So I've decided to make the following buys:

• Vanguard Developed World ex-UK tracker - £5,000

I'm inclined to continue to cover Emerging markets with a mixture of active and passive

• BlackRock EM CIF - £1500
• Aberdeen Asian Smaller Companies - £1000

Europe is a bit of a biggie as I have very little invested here and according to the chart this is the one area where low cost active management (if you can find it) can really pay off. So my fourth buy will be a European investment trust (possibly property based) although I haven't done enough research to know which one as yet.

• European IT (tbc) - £1500.

This leaves me with £1000 to add to my regular £500 contribution this month and I so will invest £300 in each of the following:

Herald IT
Fundsmith
Ishares Clean Energy
HSBC 250 Index
BG Shin Nippon

Total dealing charges: £56.50. This means that I will have £13.50 credit remaining for the rest of the quarter - I'm happy with that.

This is the plan. I just need to wait for my transfer to complete and then I can get on with it!

June 2014 Update

Portfolio Update Here

June was not a very good month for my CIS UK Equities fund. Nothing terrible, but still a little annoying as I have been waiting for this fund to transfer into Interactive Investor so that I can manage it properly for around 16 weeks (admittedly the first 8 weeks were lost due to the original transfer form being sent to the wrong address).

I'm getting quite frustrated with this now as I really do need to rebalance a little and take some of the eggs out of that particular basket. Time to make some phone calls ....

April 2014 Update

Portfolio Update here.

Buying "Clean" (Part 1).

I made another small buy into risk this week - £250 into iShares S&P Gbl Clean Energy. I did deliberate fairly long and fairly hard before doing so as it did feel like a bit of an indulgence. I don't know much about the industry and it is almost as risky as Shin Nippon with a TrustNet score of 176. But I really like the ethos behind the fund.

The S&P Global Clean Energy Index offers exposure to the 30 largest and most liquid listed companies globally that are involved in clean energy related businesses, from both developed markets and emerging markets

The news for clean energy has been an interesting mix recently (both on the ground and in the investment arena ) which means it is difficult to predict how things will go, but the amount I have put in is very small, I have nothing else in the energy/commodity range, it is an ETF so the fees are minimal and I do feel in tune with the product. I shall probably not add to this more than 3 or 4 times a year, possibly in rotation with the Shin Nippon.

So, I think my appetite for a little risk taking should now be satisfied.

I was finally spurred on to let myself have these two small indulgences by a comment I read on the moneysavingexpert forum. It was made in response to someone who, like me, has a decent public sector pension waiting for them at normal retirement age but who was wondering how to manage their investments in order to supplement this. Someone made the suggestion that perhaps they could think of their pension as a whole load of inflation linked gilts and plan the rest of their allocation accordingly. I had a bit of a light bulb moment when I read this because it makes perfect sense and gives me a reason to put my ISA funds into equities without having to worry too much about balancing this with fixed income.

I appreciate that the time-frame is important with all this and that when I am going to need the money I will have to start moving the risky bits into something that is less likely to bomb but, as far as the biggest part of the ISA is concerned, this shouldn't be for around 8 -10 years.

The SIPP that I have just started is a different matter and I intend to take a lot more care with ensuring that this will not be prone to massive jumps and dips as I will definitely need that in 8 years. My FSAVC, which I will need in 5, is invested in a very safe fund with a Trustnet risk rating of 8, so I'm not going to worry about that one especially as I phoned them this week (I am well overdue an annual statement) and it has risen by around £1,300 over and above what I put in this year and so seems to be on track to give me the £22,000 I will need in 5 years time.

So, all-in-all, I'm not feeling too reckless and irresponsible by raising my risk profile and investing in the future of the planet (and that's a whole other post).

Big In Japan

This is what we're up against:

Ruffer Tips 50% Upside in Japan within three years
Experts warn Japanese revival is doomed

These articles appeared on Trustnet within a few days of each other recently and, to my mind, this demonstrates the main reason why the majority of people in the UK still feel that investing is not for them and instead scratch about looking for an extra 0.01% in savings accounts.

Not only are most of us not experts in financial matters it seems that even if we were to become so and join the people who are "in the know",  it wouldn't protect our cash because even "experts" cannot agree as to what best to do with it. When your savings are important to you and you can't afford to lose them, having confidence about what you do with them is essential. The bottom line is that the investment universe, and all who live in it, do not inspire confidence. There is so much "talk" that we can't keep up with it all, there is too much "buy this or lose out", quickly followed by "buy this and lose out". In a way the only rational thing to do is keep well away.

I don't mean to say that we don't have faith in the big picture, I think that the majority of people believe that the markets can be relied upon to self-regulate, bounce up and then drop down again but ultimately recover. It is more that there is a bewildering gap between what looks to most of us as if it should be a science (graphs, statistics, pye charts ad nauseum) and the apparent behaviour of those who deal in it and seem to be ruled by rumour, incantation and superstition (how can we call it anything else when there is rarely any consensus and the "experts" cannot produce any reliable results based on any proven methodology).  There is no firm ground. "Information" and advice cannot be trusted.

In these days when being able to rely on our own abilities to look after our money is becoming even more important it is a scandal that the financial press seems so often to delight in what is, in effect, a tabloid-esque treatment of its subject.

Personally I am currently reading a lot of this stuff because I am trying to learn (and as a whole it is useful in order to get a grip on the basics) but more than 90% of the little I do know has not come from all the journalistic "noise" but from reliable sources such as Monevator and individuals on the moneysavingexpert forums. Maybe it's just the nature of the beast but it does make me more than a little cross that the world of personal investing acts as if it deserves to call itself a science when it seems to be sadly lacking in solid technique.

(btw I put £300 in Baillie Gifford Shin Nippon this week but only because I hadn't got any Japan - otherwise the net result of reading both articles would probably have been inertia ).

Balancing Action

In light of the pension reforms in last month's budget and, after much consideration and deliberation, I finally took the plunge and opened a SIPP with Fidelity.

The charges on this product are low considering how much I expect to hold in there (only 0.35%) and "switching" funds (ie dealing) is free. So this all seems good. The only slight fly in the ointment is that the documentation talks about needing to take (paid) advice before you can start to draw down the money but hopefully this requirement will be something that is either dealt with when the budget changes are formalised next year, or it will disappear naturally over time as the new ways of working for pension funds becomes embedded.

I set the fund up with a £1000 lump sum and initial monthly contributions of £200. The money is sitting there as cash at the moment waiting for me to decide how to invest it. This is my task for the weekend.

What I Have and What I Want.

I must admit I'm struggling a little to make a decision. I know that I have a very "unbalanced" pot at the moment. The bulk of my money is in my S&S ISA (which, btw, still shows no sign of landing in my iii account - in fact I received a Manager's Annual Report from CIS this week so they still obviously have me on their books) which is invested entirely in a UK Equities Growth Fund (apart from a tiny bit in a US Fund which is a legacy from when I sold that fund off as part of a mis-selling dispute (long story).

I have started to spread my investments around a little since I set up my account on iii, but I will only be able to grow any of these new holdings very slowly with my monthly drip feeds unless I sell some of the CIS fund (when it arrives). I'm still not sure how to go with this.

However I ran my current holdings through Trustnet's portfolio tools and this is what came out:

Asset Classes	Total(%)
UK Equities	60.3
Money Market	16.8
UK Corporate Fixed Interest	6.6
US Equities	2.5
Europe ex UK Equities	1.6
European Equities	0.2
Global Corporate Fixed Interest	0.2
North American Equities	0.1
Asia Pacific Equities	0.1
Other Holdings	11.6

Therefore I have a fair amount of rebalancing to do given that I would ideally like to follow the asset allocation given in the the example by Monevator (Slow and Steady Passive)

• UK equity: 20%
• Developed World ex UK equity: 50% (North American equity: 27.5%, European equity ex UK: 12.5%, Japanese equity: 5%, Pacific equity ex Japan: 5%)
• Emerging market equity: 10%
• UK gilts: 20%

However I have to admit that I do not plan to stick to passive funds only. The reasons for this are complex, not very scientific and mostly down to my personality and how I approach "projects" (which is how I see my goal of retiring when I want to). However full discussion of this is something for a future post I think.

In the meantime I have the problem of how to position my SIPP in all this. Added into the mix is the fact that I have a specific time-frame and amount requirement for the fund. I want to use it to help fund the 6 years between 60 and 66  at a level just below the tax threshold (ie somewhere just below £10,500 on today's figures). Given that I will have a very small pension from an old job, plus some rental income from our studio flat, this means that I ideally want to draw a further £8,000 a year from the my personal pensions. I will then use the ISA to top up to the £15,000 per year I've calculated we will need as a household until my LGPS and state pensions kick in.

My existing CIS FSAVC should see me safely through 60-63 as it should total around £24,000 by the time I need it, but the SIPP has to work quite hard to cover the years 63-66. Given the tax advantage, I would still need to put in at least £250 a month and gain a 6% return to reach my goal. This is within what I can afford (just) but ideally I don't want to have to resort to funding the ISA much less than I originally intended, so I'm not quite sure how things will balance out. I may need to make a judgement call on this at some point but for the moment I'm just going to see how things pan out.

In addition, and from the point of view that the SIPP has a specific job to do in a very tight time scale, I'm wondering whether to treat the pension as a different pot altogether rather than try to balance it in line with the rest of my stuff. 

Decisions, decisions...