Reading for the New Year and a Portfolio Update: ETF Investing Part 3

Although I have not made any more purchases, I thought it was about time to provide a quick performance update. My portfolio is up roughly about 4% based on today's closing prices all in all not too bad in my opinion, given where deposit rates are sitting currently! Also my goal is to TRY and achieve a 10% annualised return from the portfolio over its lifetime. Considering I only made my first investment in late August this year and after missing the bulk of the post crash rally things are going reasonably well. Due to my late start this year I am only aiming for a 5% return as at the 31st of December 2009. A performance update based on this measurement point will be posted in due course sometime in January 2010.

Onto the second part of this post with Christmas just around the corner I decided I would list some of the books and websites I have used in the past year which I found very useful in designing my portfolio and forming my investment philosophy. As stated back in my first post the primary goal of this portfolio is to provide extra retirement income. Investments will be passive/index tracking in nature and facilitated through ETF's. Using ETF's will also serve to keep portfolio expenses low. An ISA tax wrapper is also being used to maximise tax avoidance.

In terms of books, I like the following;
The Little Book of Common Sense Investing by Jack Boogle
Live it Up Without Outliving Your Money by Paul Merriman
The Four Pillars of Investing by William Bernstein
Unconventional Success A Fundamental Approach to Personal Investment by David Swensen

All of these books basically repeat the same mantra that active management fails to beat the market return over the long term and that a low cost index tracking or passive investing style is the best way for retail investors to conduct their investing. They also give advice on asset allocation, portfolio construction and maintenance and highlight some of the traps or risks which the retail investor should seek to mitigate or avoid altogether in their investing lives. All of the books are available on Amazon and a perusal of the reviews left by other customers should help you decide which titles you may wish to purchase.

In terms of websites, two of the above named authors have great websites which provide a wealth of information on investing from the view point of the small retail investor. The Vanguard website and Paul Merriman's website FundAdvice I found both of these exceptional in terms of educational articles. FundAdivce in particular I found to be very very good. It has model portfolios on the site and a wealth articles on asset allocation and retirement investing which are generally backed up by hard stats and tables of figures. Other good websites that I like include the following;

Kiplingers Personal Finance
Morningstar
Motley Fool
MarketWatch (See the Lazy Portfolio section)
MarketRiders

Hopefully with a little time off over the festive period some of these websites and the aforementioned books could be worth a look? One of the books might even be worth buying and reading. With some research done between now and New Year perhaps you will like me, seek to follow a similar passive/index based investing path with your own investments in the New Year.

First trades and first mistakes. ETF Investing Part 2

Well after spending months reading about ETF's, how to build a balanced portfolio, about asset allocation and about keeping expenses low in your portfolio I made my first trades. I created a balanced model portfolio on the Money Observer website which has all the allocations for each of the different asset classes and the further diversification within those asset classes as discussed in my first post.

I did 3 trades, all for lots of about £300 - £400 each. The 3 trades were into ETF's covering emerging markets, corporate bonds and an Asian high yield dividend ETF. All 3 were on buy signals according to my trading system. However I soon realised that after building in the trading cost of £12.95 per buy trade that is was going to take me a long time to make any sort of decent returns when my trading costs were so high compared to the size of my trades. Moral of my story from the first 3 trades is that small retail investors not only need to worry about ongoing management costs and account administration fees they also need to take into account in a major way the affect of transaction costs on their investment returns when doing their trades until they have a reasonably sized portfolio.

To that end I have decided not to do any more trades until I have saved up enough money to ensure that the transaction costs do not exceed more than 1% of the total traded amount. This is a lesson hard learned but something all small investors need to take heed of. Going forward I am going sacrifice some underlying diversification in the various asset classes in my portfolio until my portfolio gets a bit larger so that when I do decide to allocate say 5% to green energy in order to further the diversify the equity part of my portfolio the trade will actually be a meaningful trade and one where trading costs will have a minimal impact on the returns of this allocation.

First post or is it blog? ETF Investing Part 1

Hello

I am a novice UK retail ETF investor. This blog has been started for a number of reasons. One, as a pseudo trade journal of my trades that I can review, but also because I couldn't find any good websites or posts about ETF Investing that were at my level of investment knowledge. Most financial educational programmes, websites, podcasts etc are either pitched too low for me (i.e. explaining to people what an ETF actually is) or at the other end of the spectrum the trading idea's, products or tips from the likes of the FT or CNBC are not really available to the small retail investor. So I decided to start this and see if there was any interested in reading about the trials and tribulations of a small ETF investor. If that doesn't happen it will still serve the aforementioned purpose of being my online trade journal.

Like most people I spent a long thinking about investing without actually taking the plunge into the markets. I have a keen interest in financial markets and work in financial services but I would also describe myself as having low tolerance for risk and the stock market is relatively high risk. However this August I took my first steps into the shallows after been driven to the markets edge by the poor yields available to savers which is where my assets predominately are invested in currently.

My strategy/rules for investing or for the portfolio are as follows;

Buy on signal 50 day EMA > 200 day EMA

Sell on signal 50 day EMA < 200 day EMA

Cash from sell signals is to be held in cash until a new buy signal is generated or is to be used in rebalancing the portfolio following the disposal. Given the collapse of nearly all asset markets in 2008 a large allocation in cash is possible

The portfolio will have a broad asset allocation consisting of the following asset classes 30% fixed income, 10% precious metals, 60% equity. The goal is for the portfolio to be 100% invested subject to buy signals in all assets classes being in place. Within the equity allocation there will be further diversification into domestic equity, developed international equity, emerging markets equity, reit's and other sector's allocations such green energy in order to build a broadly diversified portfolio. Also within the fixed income asset class there will be further diversification into inflation linked, corporates/high yield and medium term government debt (2 - 7 year maturities)

ETF's are used to keep TER's (Total Expense Ratio) as low as possible. The average TER of the entire portfolio is expected to be in the range 75bps (75 basis points = 0.75%) - 100bps (ideally to the lower end of this range)

All assets are to be held in an ISA for tax efficiency purposes both on the capital gains side and on dividends/income side

Rebalancing will be performed when any of the 3 main asset classes get +/- 5% away from the desired level within the portfolio

A maximum allocation of 20% to anyone of the 9 Morningstar style boxes

A maximum allocation of 20% to anyone geographical area as defined by the portfolio x-ray tool on the Money Observer website. See link below.

The portfolio will have bias towards value over growth stocks

The Money Observer websites portfolio x-ray will be used to monitor the investment restriction/guidelines/rules call them what you will set by myself.

The overall purpose of portfolio is to build it up over the long term, in order to supplement my occupational pension. The level of capital to be invested should hopefully equate to my ISA allowance every year depending on my financial circumstances in a given year. Thus over a 15 year period it is hoped that the portfolio will have up to £100,000 invested in it along with any associated performance.

All questions, comments and observations about my investing are welcome. Learning is a life long exercise.

As I do work in the financial services industry I feel I should put the following disclaimer which will cover this post and all future posts as I not authorised to give investment advice. The information contained in this blog is intended for information and interest only, and not to either provide advice to, or to address the particular requirements of any individual. This blog is primarily my own investment journal anything pertaining to investment advice is to be considered incidental.

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