Evolution of a DIY Investor
Time just whizzes by – more than 6 months ago I did an interview with DIY Investor and this is the first time I have got around to a follow up to inform readers of my progress.
2017 turned out to be a pretty decent year for me although split into three parts – a very strong start until April, a flat and tedious middle part of the year and then a final flurry which boosted my trading ISA to a return of a smidge under 20% for the year.
Considering the fairly low level of risk I take, and the low level of actual buying and selling that I do, I really can’t complain at this result – I target 10% return each year, but have a peaceful life where I sleep soundly and I clearly did very well against this.
‘the market has a very perverse sense of humour’
If you go to my blog page and look under ‘Scores on the Doors’ you should be able to find a comprehensive breakdown of the returns on my various portfolios etc.
The strength at the tail end of 2017 carried me into the first week of 2018 when I was up hugely (the best start I have ever had to a year), but of course there was no way that could last; the market has a very perverse sense of humour and always gives us a kick up the butt when we think things are looking good!
After that high, my portfolio continued to slide through the remainder of January and then really hit me hard in February – apart from one particularly nasty week it was ‘death by a thousand cuts’. I find these the worst conditions – I would rather have a severe and sharp drop and get it over with than a constant drip, drip, drip of losses playing havoc with my psychology.
For years I have been obsessed with the idea of using spreadbet shorts on major indexes to ‘hedge’ my long portfolio of stocks and make money in falling markets (it is possible to use a ETF like XUKS to short the FTSE100 – you buy and sell it like a normal stock but you gain if the index falls and lose if it rises – a bit weird!).
I have had patchy success at and when I screwed it up totally in 2016 it taught me an important lesson about position sizing and strict discipline, with tight stop losses an essential part of an overall ‘system’.
‘you gain if the index falls and lose if it rises – a bit weird!’
This led me to refine an improved approach to my index trades; I no longer refer to it as ‘hedging’ per se because I now take smaller positions and go short when markets start to fall and then go long in a small way when they bounce – this worked really well during the February rout.
I will produce a blog post on my website in the next few weeks to explain my new method in detail.
It is relatively simple to reduce ‘stock-specific’ risk by using quality stocks and by good diversification across a variety of factors such as market cap size, strategy (income, growth, recovery, undervalued, defensive, momentum etc.), sector, etc.
I then combine this approach with some simple ‘trading tricks’ like scaling-in to positions in chunks and top-slicing when appropriate if a stock goes well for me.
I suspect the vast majority of investors do something like this but I think very few people actually have a decent method to help reduce or control ‘market risk’ – the approach many take is to just cross their fingers and clench their teeth!
My method of shorting an index means I make money as the market falls and this offsets to some extent the hit I am taking on my long portfolio of stocks – it also has an unexpected benefit that I find it keeps my psychology much more under control and I stay calmer and more rational – exactly the kind of state of mind we need to be in if we are going to make good decisions and maximise profits.
Keeping a cool head in this way means I can focus on trying to figure out when the markets are bottoming and I can then close my short position, bank the profit and then open a new long position on an index to catch the upswing (the move up off the bottom after a pullback is always a period of very fast gains).
In terms of the psychology, I find that having a short on takes my attention and I am so pleased that my short is doing well that I get distracted and forget about how the shares I hold are falling!
Since the challenges of February, the markets have started to recover and my portfolio is now nicely up for 2018 so I am very happy. We are only a couple of weeks into March but I feel quite relaxed about how things are going and I suspect the drop shook out a lot of weak holders and now the markets can perform OK for a bit – my concerns really are around the end of March and April when the markets can often go a bit smelly just before Summer. I will keep a close eye on things and be ready to short if I have to.
‘trade what you see, not what you think’
My new obsession (to add to my index trades fetish!) is a desire to ‘cut out the noise’ and to make how I do things a lot more simpler – this is something that has got into my brain over the last year or so and I am putting a lot of focus on these ideas. In particular I am deliberately avoiding all the opinion and stuff which comes out about stocks and I am getting more focused on the technical side of investing by using charts to help me make decisions – ‘trade what you see, not what you think’ is ringing a lot of bells with me.
Very recently I wrote a five part blog series on my website called ‘Evolution of an Investor’ where I used the first four parts to write in detail about all my 19 years or whatever it is of investing and then in the final part I put a lot of effort into outlining where my learning efforts are being focused as we go forwards – this includes a lot on ‘cutting out noise’ and simplicity.
Apart from the odd index trade I am not really doing much in terms of buying and selling of stocks; I am on the whole very happy with the stocks I hold and in no great rush to sell any – I might top-chop the odd position a bit but in general I want to ‘run my winners’.
I am convinced that one of the most basic (but hard to avoid) errors that most people make is to buy and sell too often; by reducing this turnover of stocks I am having a much easier life and I am lowering costs on my portfolio a lot.
As always, full details of my portfolios and the trades I am doing are listed on the website.
OK, that’s it for now, ‘til next time,
WheelieDealer & social media interview with Tamzin Freeman of www.piworld.co.uk – content for private investors for private investors