2011 ISA investment review – rough waters but maintained speed and heading OK

Most people do their new year review in January, and it’s still January, even if I’m nearly a month late. Last year I was looking for income, and this year I can look back, and conclude that I got it, to the tune of about 4% on the cost of what I put in. That’s possibly a minor fail as I target 5%, but I only have two-and-a-half year’s worth in my ISA and I buy throughout the year. So it’s possible that the ramp up across the year has something to do with that.

Diversification is okay. I’ve sliced this by sector rather than geography. I have terrible geographical diversification in my ISA, 93% UK exposure. A lot of these companies are big fish so I am not 90% exposed to the UK domestic market, which would have me running for the hills. I have much more than my ISA in pension AVCs balanced 50:50 UK/emerging markets so I am okay with that geographical imbalance.

ISA diversification by sector, Jan 2012

The investment trusts are going to start to be a problem with evaluating diversification, unless I find a way of representing their internal structure.

There’s a theory that in a HYP you shouldn’t look at the capital value it’s hard to resist. Mine happens to be a little bit up on purchase cost after I take out the dividend income – it depends when you look at it so it’s hard to say how much. So the total value is constant, as inflation knocked 5% off the value of money. For comparison the FTAS is off about 3%, not sure what the yield on that is. At times in August 2011 my ISA was 7% down on purchase cost. There’s no real statistical significance I can ascribe to this with such a high noise level in the signal.

I bought shares in five different companies this year, added to an existing holding, and intruduced low level of index tracking to benchmark how I am doing in future. I will use more index tracking for foreign markets. It’s expensive to trade individual shares in non-UK markets for me and what the hell do I know about companies in emerging markets anyway. Something that concerns me is that index tracking is totally dumb money, and if it is targeting a popular index like the S&P500 that dumb money may unbalance valuations. I look at popular index tracking as a potential source of trouble for concentrated indices like the FTSE100 (which I don’t track in my ISA) or the S&P500, which I may track at some point.

what went wrong

I screwed up a few times and crystallised nearly a thousand pounds of losses, though I also crystallised about £500 of gains. Dealing costs this year were at most £90, there are no annual charges.

I should never have bought BARC, but at least saved my hide by acknowledging the mistake for the cost of a couple of hundred quid. The draw of my past history as a speculator sometimes breaks out. How am I to evaluate what is a fair price for a bank in this environment, FFS, especially a slippery bunch of characters like Barclays? I got sick of Aviva acting as a europanicometer, it fits most of my requirements but I couldn’t stomach the volatility. I should have either qualified the volatility first or held out for a lower price, which would make the volatility easier to take. I know that’s called price anchoring, but I can only fight so many investing character foibles in any one year.

Having two financials added a huge degree of day by day volatility. And I hate Euro exposure at the moment. No good will come of it IMO until people work out exactly what they want the Euro to do for them, and then do whatever’s needed to make it do that. Or surrender to the steamroller of the irresistible force of the market meeting the immovable object of the canard that is a unified currency without a unified government…

Other shares I’ve sold I should have let be and left them to mind their own business, reviewing what I thought at the time and what happened since. I move all sales to a ‘sold’ portfolio in iii to keep a watch on how that went. It is instructive, in general the right response to a sell urge (other than BARC) is to ignore it. Selling IAPD was daft, it wasn’t really doing any harm in my portfolio, it just a little down. D’oh.

Selling IUKD was good after I discovered it didn’t really match what I thought it did, ie value invest. IUKD can be ascribed to a failure of research and thinking, so the need to back out of it was reasonable, it’s better to acknowledge a mistake and correct it that leave it to fester. It’s also a reminder that income investing is inherently subjective, no passive approach is possible because of the problem of identifying and avoiding value traps.

what did I learn from 2011?

Overall, I seem to be OK on picking what to buy and a bit on the trigger-happy side in selling. If I’d taken Charlie Munger’s punch-card approach and just sat on my hands as far as selling I’d have done better, even after eating an increased loss on BARC. Guess that’s why Charlie is Warren Buffett’s wingman and not me, eh?

Becoming a better investor is largely about mastering impulsive tendencies and getting lost in the fog of war, I paid £500 for the training this year which isn’t so bad. Something I have noticed is it is far easier to retain equanimity in the face of individual variations once there is a decent number of holdings and reasonably sector-diversified. I have 12 holdings, though two are index funds and two are investment trusts and therefore internally diversified again. Half of these I’ve held since buying them in the first full year of having this ISA.

what went right?

The big picture did. For all the cock-ups, I consider I did okay and reasonably battle-tested the greater stability of income versus the volatility of share values. There’s no need for me to take along my CV to become a trader in the City of London, and I’m still a little way from matching unemployment benefit in income, but getting there.  In some ways investing against my worldview makes the exercise a lot more intellectual which makes it easier to stand back and learn. I’d hope not to look back at the end of 2012 and have repeated too many of 2011’s mistakes. Heck, there are no end of new mistakes I can explore this year 😉

I was able to weather serious market volatility (and even buy into some of it) during the summer riots, US budget freeze-up induced volatility and general bad temper without taking too much of a hit. However, the Eurozone break-up is yet to come, and that will test nerves no end. The FTAS suffered a 50% fall from July 2007  to April 2009 so there’s precedent for some serious grief ahead.

2011 was a rough year, but I was genuinely surprised to find out I hadn’t taken more of a hit this year. For this year I want to diversify into oil, mining, and beef up utilities. The pharma didn’t start off so high, it had the temerity to quietly go away and increase of itself, so I’ll leave it be and go elsewhere this coming ISA year.

Geographically I could do with some US exposure, and maybe some AsiaPac again. I’m still just not going to do China, but India may appeal. Theory would indicate I should also increase Europe exposure, but I just can’t bring myself to do it at the moment. Temporal diversity seemed to work too, buying across the year rather than all at the start or all at the end smoothed some of the volatility.

unlike most people, I don’t invest for the world I expect

Keeping a clear head is difficult for me because my world view remains that industrial civilisation is running on borrowed time. Events this year seem only to confirm that the assumptions behind our economy are failing. Unemployment is still rising, to levels among the young that I have never seen.

To me this looks like the advance guard of globalisation and resource crunches reducing Western living standards. It will happen for the rest of the Western population by inflation as governments create money to service their promises to the electorate; “you will be poorer tomorrow that you are today” is not a vote-winning thing to say. Mervyn King claimed that we have averted a Great Depression. The time you can say that is when you look back at the darkened valleys from the sunlit uplands of the next bull market, not when growth has switched back into reverse and we are about to enter the second dip.

We have had an oil war in Iraq, another one in Libya, about to have another one in Iran. Oil is the magic that enables the myth of continuous growth, and the last decade has seen us add a huge number of people who want a slice of that action, just as production seems to be levelling off for the decline.

These problems seem to be inherent in industrial civilisation – as JK Galbraith said in The Age of Uncertainty

The present age of contentment will come to an end only when and if the adverse developments that it fosters challenge the sense of comfortable well-being.

Galbraith had another pithy quote, however, for those who would act on their specific worldview.

the only difference is between those who know they don’t know and those who don’t know they don’t know

I’m in the latter camp here, and the world has always had existential dangers that could finish it off. I therefore diversify world-views, and choose to invest as if I saw a distant sunny horizon.

Unlike some, who are upbeat enough to see sunrise as a bullish indicator I am fighting my beliefs to invest in the market at all. I have also diversified to non-financial investments to hedge against being totally wiped out in a financial firestorm, assuming some form of the rule of law still held. If it doesn’t, I just have to do the best I can with whatever I have to hand, you can’t save against that…

2011 had the London riots, and all over Europe we see high youth unemployment. Across the West the Occupy movement gives some expression to the feeling that something, somewhere is more fundamentally wrong. Greece is yet again to surrender more sovereignty to the technocrats, because the one thing they can’t do is take the hit for their uncompetitive ways through currency devaluation. I wonder if there is the scent of Steinbeck’s bitter harvest rising in the air

“In the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage.”

I aim to become a better investor over time

Reviewing what happened, and discriminating between errors of judgement, and random noise seem to be the key here. I slowly grind out some of the  foibles and irrational predilections over time. I think it begins to show. Fortunately in the way an ISA works with the limited input, I was able to remind myself of some of the things that I should have learned in the dot-com bust with the least amount of money at risk. The road to self-improvement is rarely a straight line. The Delphic Oracle’s enigmatic  Know Thyself is the key here, so that when, eventually, my ISA holdings begin to deliver about half my income I should be a safer pair of hands.

So despite a naturally fearful and non-optimistic viewpoint, an ermine’s ISA survived intact and delivered most of its aims, indeed it’s the second year that the yield has been > 4% on purchase cost. Although I don’t use the income at the moment, it would be a decent bump up in tax-free income if I did use it.

One of the limitations of an ISA is also starting to make itself apparent. If I leave work this year, I will be spending several of the next few years trying to get money into the ISA in order to win a tax-free income from it. The money I’ve saved in pension AVCs destined for my 25% tax-free lump sum would take several years to shift into an ISA, and this year is complicated by a possible need to bed and ISA some of the sharesave shares. Next year I will also have to think about opening a S&S ISA with a different firm. I’m happy with iii, but I only want to fill it to about three-quarters of the FSCS compensation limit (*) of £50,000 to give it room to breathe in the forthcoming awesome bull run from 2015 to 2020 😉 .

*Note FSCS compensation on S&S ISAs is against the ISA provider iii going bust, it doesn’t compensate me for making crap investment moves 😉


9 thoughts on “2011 ISA investment review – rough waters but maintained speed and heading OK”

  1. Boy,phew, your portfolio looks really complex. With regard to Eurostocks, why not look for large Euro multi-nationals that do a lot of business outside “the Zone” ? ( Nestle, Seimens, Schlumberger etc.)Congrats on doing $4+ percent ! Best of luck in 2012 !


  2. I’m trying to understand why you’ve said “a possible need to bed and ISA some of the sharesave shares”.

    My understanding of the jargon is that “bed and ISA” means to sell an asset outside the ISA and immediately rebuy it inside, allowing one to maintain exposure while crystallizing a gain or loss outside the ISA.

    But you’ve no need to do this with sharesave shares – they can be directly transferred into an ISA without needing to sell and rebuy – the associated gain on them just disappears. Once they’re in the ISA you can sell them and buy something else, so it’s a win-win – you’ve avoided the gain on the sharesave shares, gotten rid of them (which I assume you want to do given the usual advice against owning too much of your employer) and funded your ISA for the year. And you still have your CG allowance (which you can use on selling more of the sharesave shares if you have some left over).

    It’s probably what you meant to start with but I found it confusing…


  3. @g I’ve considered that approach, though it was news to me that Schlumberger is Dutch! Which sort of indicates stockpicking may not be my forte, hence the appeal of some sort of index fund. It’s the currency risk that I have no feel for. In principle if I buy Euro 100 of Siemens and the Euro goes titsup the worth of that stock should be roughly the same in New Deutschemarks. With the mayhem in the Euro it’s hard to know the value of anything at the moment!

    @David I probably did use that wrongly. I have two issues with the ISA. One is that the potential profit from the sharesave if I leave and discharge the 3 and 3/5ths fo the 5 year scheme is over the CGT limit, and the share value is therefore by definition > the ISA limit. Although if I leave, the imperative to minimize exposure to my employer is removed and it would deserve a place in a HYP, I don’t really want to hold shares outside an ISA.

    I will probably have to hold a rump outside the ISA or sell that portion, and a second problem them is that it stymies me buying anything else in an ISA until August. I haven’t really got my head round this one, apart from identifying that the ISA limitation is going to be a PITA for me.


  4. You know we’re gonna have another US budget freeze-up next month? Just in time for Greece to reject “loss of sovereignty” over their right to spend other people’s money and further create turmoil.

    February is going to be an interesting month


  5. Ermine, regarding your point about the FSCS compensation for your ISA, I think you’ll find that it’s only cash or funds that are covered (and only up to the first £50,000 for the funds), but any share holdings are not covered at all, as they belong to you not the ISA provider, so as long as the broker keeps the properly separated, which they must do, then you have no problem, the shares would just be transferred to a new provider. How that all works in practice with a firm going bust is another matter, but would be a time issue not a loss issue.

    Hard to find actual written evidence of that on the FSCS site, but that’s my understanding and confirmed many times by questions on the Motely Fool.



  6. Ermine, a question for you about your diversification strategy, which I like and follow myself. I know you’ve mentioned several times in the past your plan is for trackers and HYP, but do you now consider any growth shares or punts at all?

    I try to diversify by sector and country and am moving more and more of my share purchases into HYP shares (recently Aviva, Astra Zeneca, Tesco after the big fall, BATS) but I always have a reasonable holding of growth shares. Not some indiscriminate bunch but shares in sectors that over the next ten years, though possibly not all of them, should do well due to wider macro growth.

    For the last few years I’ve averaged around 20% growth, plus dividends, across the portfolio, and this is almost all down to owning shares in the Apple and smartphone phenomenon, through shares in Apple, ARM and Imagination Technologies.

    None of these were random punts on tech companies, but a considered bet on the obvious trend to increased ownership of smartphones, in the West and increasingly the East. None were bought at anything like the bottom of their price drops in 2008.

    I’ve also got shares in about 6 different small oilers, as again this is the current obvious momentum play, and 6 different gold explorers/miners., as these are also looking like a good long term play.

    Other than the Apple universe, none of the above is in significant amounts though growth in some of them has me now thinking about cashing out half of my holdings.

    My plan is to run with these, use the profits to build up more income yielding shares, using loose stops to ensure I don’t lose all the profits, until lit’s clear these sectors are not the right ones to be in anymore, then close them down and move on.

    By not punting at the start I missed massive jumps (IMG fell to under 30p in 2008 but I only bought in as they got back towards 100p, yet still they have gone up 600% since then.

    I know this all sounds like a big risky game, but I think it’s the best way to truly diversify in the market, and keeping it small and spreading into a few different sectors keeps the risk spread but offers great ways of building capital.



  7. @TNT

    > as long as the broker keeps the properly separated, which they must do, then you have no problem

    Thinking MF Global… okay they didn’t deal with the small fry but that sort of thing can break down, which is what I percieve as the main hazard, criminality. But if FSCS doesn’t apply there, I guess it makes the case for diversification of ISA institutions stronger.

    Absolutely agree that the absence of growth stocks in my portfolio is an increased risk, it excludes a large class of firms, it reduces my investment universe. The reason I go for a HYP is because I have a rotten track record with growth stocks. I was a momentum-chaser in the dotcom boom and bust. I held ARM and IMG (think they were called videologic then) in the dot-com bust, should have held on, etc etc.

    I am no good with growth stocks, and the absence of a dividend stream makes me jittery and trigger-happy. At least my £200 loss on AV. was softened a bit by the £69 dividend payment. Indeed, I gave up half of my ISA gains this year to overtrading, and that’s with HYP shares. So I have to invest according to my own character, and try and avoid character weaknesses. You can only fight down so many bad habits in any one year, and I still have too many even in a restricted universe.

    I could retreat to the “safety” of index investment, but I fear the mindless concentration in popular index shares like the FTSE100 or the SP500 is building the next scandal/bubble in years to come. So I’m still trying to become a better active investor over time. In the end I don’t need a blistering growth. About 5% income and my capital roughly tracking inflation if integrated over 5-10 year periods will do me fine.

    Others, however, may have more talent for working with growth shares or across the patch. Your plans look well considered, so hopefully they will deliver taken as a whole. I’ve personally never got on properly with stops, but maybe that’s just another area of relative weakness.

    I know SG seems to do okay with growth shares, but they’re just a man-trap for me 😦


  8. Fair enough!

    When I say stops, these are pretty loose, and not entirely scientific or fixed. The one I find works best of all is the 200 day moving average. But I’ll only go there for these shares (I hold others which I trade more readily) I will only sell if the story changes or the prices get too far ahead of reality – so I’m currently watching IMG and ARM closely as they trade around 70 PE, but Apple are only at 11, even at $450, so i’d stick with them for some time even if they dropped a bit.



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