Why I’m loading up on shares for 2014

2013 was a pretty darned good year for private investors.

Later on, I’ll run through the main sectors and then we’ll look at asset allocation for next year. But first, let me just remind you why 2013 really was such a very good year.

We kicked the year off with the biggest shake up ever seen in the retail investment sector. The Retail Distribution Review (RDR) was largely about opening the eyes of investors to the vast fees they’d been shelling out to the finance industry (in particular independent financial advisers, or IFAs) over the years.

As the real cost of funding these guys started to come to light, many private investors said “No thanks, I’ll go it alone from here!”

And if investors didn’t drop their IFA, there was a good chance the IFA would drop them. For their small clients, the new fee structures simply weren’t worth the effort.

This was all great news. There’s never been a better time for individuals to take control of our own finances. Online investment platforms, the ease of shifting accounts between providers and a general bounty of online information allows us to take control of our finances like never before.

Public flotations were plentiful and mostly pretty successful. Royal Mail Group undoubtedly buoyed public perception of the share market.  It wasn’t quite back to the nineties… but there was certainly an air of confident exuberance about the markets. There was good news for Isa investors too. Osborne loosened the rules, allowing them to invest in the AIM markets for the first time.

And I can see the air of confidence continuing well into 2014. Those of us who aren’t punting it all on housing will probably want a bit of action in the markets. So without further ado, let’s see where we’re going…

The all-important equity market

Equities had a good year. Having kicked off January at around the 6,000 level, The FTSE100 ends the year nearer 6,600. That’s up a healthy 10% – add in dividends and you’re probably looking at nearer 13%.

With the ghost of Europe-past sidelined, and the US fiscal standoff held off (again!), the markets pulled back from moments of panic. Anybody swing-trading FTSE lows would have had a whale of a time.

I was pleased that I increased my equity allocation last year. I know that many people didn’t agree with that at the time, and I totally sympathise. It was ‘hold your nose’ investing – I might not like quantitative easing (QE), but I can’t deny its impact on the markets.

But sometimes that’s just what you’ve got to do. Anyway, we believe in a diversified portfolio here at The Right Side. Let’s see how the more staid, fixed-income sector fared…

The hunt for yield continues

I have long-since dropped my UK government bond holding to insignificant levels. As we entered 2013, the yield on the benchmark ten-year gilt was around 2%. For anyone that wanted to lend to the government for ten years, earning less than inflation… that was up to them.

In fact, it would have been a smart move to unload government paper at the beginning of the year. And that’s because yields have risen to a more realistic 3%. Remember, a higher yield means that bond prices have fallen. We can leave all that overrated stuff to the pension and insurance funds…

When I talk about bonds, I’m really referring to the fixed income sector, which includes both the retail bond market and fixed income stocks such as preference shares.

And with the continued hunt for yield, these stocks had a pretty good year. Of course, I can’t speak of 2013 without mention of one particular bond, the Co-op Bank’s 5.555% bond that I’ve been writing about over the year.

I am delighted to say that despite all the shenanigans that went on with this grossly mismanaged institution, these bonds did pretty well. The great lesson here is, it’s what you pay for your investment that determines whether it ends up a winner, even if things go wrong!

Because this bond was at such a big discount to its face value, even when bondholders were forced to take part in the UKs first major bank ‘bail-in’ it left a profit at the end of the day.

That said, this episode speaks volumes about the risks that bondholders are now forced to carry in order to secure a yield. And for that reason, there will be changes to my bond allocation this year. More on that in a minute.

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The inflation hedges…

Despite the aggressive money-printing by most of the major central banks, inflation didn’t let rip in 2013.

Global energy prices were pretty stable, despite some growing tension in the Middle East. Resource commodities fared a bit worse.

During 2013, I was happy enough with my oil majors, not least because they’re pretty good yield stocks. But the mining sector, and resource related stocks had a pretty rotten year.

Precious metals fared even worse. Gold and silver confirmed their positions in a particularly sickly bear market. And as for precious metals miners, 2013 was a horror show!

In fact, the gold miners are now in a particularly interesting situation. But before we look at them, let’s just deal with the remaining major asset class…

Cash

The one good thing about cash is that you can’t go too far wrong with it. I entered 2013 with a reduced cash holding of 20% – down from 25% in 2012.

I see cash as a great stabiliser for a portfolio, steadying the boat. It also gives me some ammunition should the markets take a hammering. Other investors prefer a ‘short’ position in an index as a hedge for an equity portfolio. But this can be an expensive way of balancing a portfolio. Holding a short position over an extended period isn’t much fun – especially in these markets. Give me cash any day of the week.

And anyway, if you are sensible and keep up with the ‘best buy’ league tables in the broadsheets, holding cash needn’t be that expensive. There are many accounts generating 3% – or even up to 5% – on cash. Yes, it’s a bit of work chopping and changing accounts to keep up with the best interest payers, but at least you’re earning money on your savings.

Given the relatively benign 2013, we had no need to dip into our cash reserves. Let’s just look at that as a positive!

Why change a good thing?

 
2013
2014
Change
 
%
%
Cash
20
20
0%
Commodities
30
30
0%
Bonds
20
15
-5%
Equities
30
35
+5%

 

Given the solid performance in equities, and the fact that all the evidence suggests a replay in 2014, I can’t help but increase my equity weighting as we enter the new year.

To finance my 5% increase in equities, I’m selling 5% of my fixed-interest (bond) holdings. Effectively, I’m continuing the work of 2012 and 2013, which saw my fixed-interest holding reduced from 25% to 20%. This year, I’m looking to drop down to only 15%.

Fixed income has had a good run over recent years, but it looks like a crowded market now. Everyone seems to have finally acknowledged that low rates are here to stay for quite some time.

During the good times, you may remember we were picking up yields of up to 12% on a pub landlord bond; and we got 9% from a Russian warehousing landlord. But now everyone and his dog is chasing this stuff. Yields are down, and that’s why I’m out.

As the Co-op fiasco proved, we’re being asked to take on outsized risk in order to get our reward.  Given the central planners’ insistence that equities go up – then why not go along for the ride?

But look, I’m only upping my equity weighting to 35% – that’s still considered pretty conservative by many in the industry. That said, it’s worth bearing in mind that a lot of my commodities exposure comes by way of equities in specialist funds and mining stocks.

Though I’m not proposing to change my commodities weighting (30%), I am making some amendments within the allocation. Specifically, within the precious metals subclass.

As I mentioned, gold is in a bear market. Given strong global demand for the stuff, I can’t pretend to know why. But looking at the chart, you can’t deny it. But to look at the state of the precious metal mining sector, you’d think that Armageddon had struck. I hold stocks that are down from £12 to 70p; another is down from a tenner to just over a pound.

The way I see it, many of the precious metals miners now offer a binary bet. This is a bet that could lose your whole stake should the gold price continue to drift – so bear that in mind! Mining costs have gone through the roof over recent years, many of the miners expanded too quickly when the going was good. And if things don’t improve, we could be looking at bankruptcies. Right now, there’s despair in the sector. That’s one side of the bet – you lose!

But, if gold can reverse its downtrend, then many mining stocks will be fundamentally re-evaluated. The upside could be many multiples of current share prices.

2014 could be a year of opportunity for the brave. The precious metals mining sector offers an interesting bet. Heads, you win – many times over. Tails, you lose – perhaps the lot! If you’re like me and you think it’s an interesting opportunity, you should take a look at Simon Popple’s research. If things go right for gold next year, his mining stocks could make a killing.

I’ll keep you updated on my moves as we head through 2014. In the meantime, enjoy the festive period and have a good long think about your own portfolio weightings.

It’s sure to be another exciting year in the markets. And a very warm welcome to anyone that joined us this year. Here’s looking forward to a prosperous 2014.

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15 Responses

  1. 25/12/2013, Sage of Aldershot wrote

    Thanks for the great writing through the year, Bengt, and happy holidays!

  2. 25/12/2013, jimtaylor wrote

    I have spent the past 4 years rotating out of cash and bonds to top up on equities and while cash may make something of a comeback, it will still be a while and I cannot understand why anyone would want to be in bonds at this time, but many are.

    Bengt, keep the articles coming and have a happy season of compulsory enjoyment.

  3. 25/12/2013, Oscar Foxtrot wrote

    Yes thanks Bengt for all your thoughts over the year.
    I think 2014 could be a great year to pound cost average into gold and silver as prices bottom out.

  4. 25/12/2013, brianlom1 wrote

    Hi Bengt,
    You mentioned preference shares in passing but you didn’t really say anything about them. Are there any preference shares you would recommend for 2014?
    Thanks,
    Brian

  5. 25/12/2013, SargeSarge wrote

    I notice that your cash earns very little interest. I invest in Zopa and thincats where after fees and bad debts I have been getting over 7%, do you think this is an alternative for cash investment?

    David

    • 28/12/2013, Sevo wrote

      David,
      Does your 7% yield include taxation? I have a small amount invested through Funding Circle (but by no means a significant chunk of wealth).
      I mainly use this for “fun” and to get me used to examining small businesses (and to make me look at balance sheets). Through this method my cash yields about 3.5% net which is better than the bank but more risky.

      Equities are looking more attractive overall IMHO.

  6. 27/12/2013, gamesinvestor wrote

    Agree about the need to move away from all fund managers as an unnecessary way to invest in today’s markets with freely available self select products and low or zero cost options.
    The investment portfolio of 20% cash; 30% Commodities; 15% Bonds; 35% Equities looks rather weak with a poor return on cash; commodities and a high risk of real value declines in bonds. I really don’t see the attraction in such a portfolio.

  7. 27/12/2013, mr clyde wrote

    I agree – I’m pretty much ‘all in’ with 20% cash, 10% commodities, 10% property, & 60% equities.

  8. 27/12/2013, gamesinvestor wrote

    So based on the title of this article, which equities (individual shares or pooled investments – assuming you don’t have views on individual shares) are you investing in?
    It’s hardly loading up on shares to state you are increasing your exposure by 5%.

  9. 28/12/2013, Sevo wrote

    With interest rates low and the tories seemingly wanting it to stay that way, it seems that equities will continue to bull their way until the next election at least. As such I shall be increasing my holdings with a view to tapering down again at short notice.

  10. 31/12/2013, vskeptical wrote

    If you were rebalancing properly you would be keeping the equities allocation constant and diverting cash *away* from stocks as their prices increase. Instead you are just chasing the market up.

    This spells optimism with a capital ‘O’.

  11. 02/01/2014, Warun Boofit wrote

    Junky bonds are highly volatility something I had not fully grasped at the time, the Coop 5.555% lost 32% of their value from May2013 within a few weeks then quickly rose by 100% when the hedge funds and Mark Tabers band of PIs voted against the BODs proposal to burn the bondholders, so much for the Coops ethics. Your recommendation has come good, my only regret is not being greedy when others were fearful as Mr Buffit is often quoted as having said but thats difficult when you have seen 32% of your investment evaporate and a total loss was looking very possible, hindsight is no use in this business. So far so good but what to do now if 2014 does not look good for bonds ?

  12. 07/01/2014, kris a wrote

    After losing a lot of money in the 2000 crash I invested heavily in gold and silver and things were going well. Too well for those whose interest it is to keep the price of these commodities down. I now see that the price of gold and silver is rigged and manipulated on a daily basis. You only have to look at the Bloomberg charts that irrevocably show that if the price is allowed to be set by the markets, it rises. After the morning price is set both in the UK and the USA, it suddenly drops. Time after time. The goldmines cannot produce gold at the prices set by this process. It is time the Authorities stopped this practice – but as the central banks are involved, it is not likely to happen!

  13. 10/01/2014, Tyler Durden wrote

    I’m pleased Bengt likes shares. Alas, I won’t take the time to play that shell game and a major crash is out there waiting. Shares might get a last shot in the arm but the risks are enormous.

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