I am fortunate to have spent much of September holidaying in the Caribbean (remember that frivolous spending fund?) where my holiday reading was Game of Thrones. Virtually every chapter includes speculation from one of the characters that “Winter is Coming”. Well, I’ve just finished the second book and this dreaded winter has still not arrived. This reminds me somewhat of current stock market commentary. For the past year or so, an increasing number of people have been calling a market top and an inevitable crash/correction and seemingly, quite a few private investors have been moving to a higher proportion of cash over the summer months.

It does seem as though valuations are becoming a little stretched and business performance might struggle to keep pace with expectations. This said, the markets seem quite willing to climb a wall of worry with even the threat of nuclear war being nothing more than a sideshow, especially for US markets. It doesn’t feel to me like we have reached a euphoric level in the UK markets though – I remember during the dotcom boom/bust what euphoria looks and feels like and we are not at that stage yet. Virtually nobody outside the regular investing community seems to be aware that we’ve been having quite a bull run recently and the likelihood of imminent global recession seems low – the UK on the other hand could be another matter with the effects of Brexit, inflation and rising interest rates still to fully feed through into the economy. For this reason, I am generally continuing to avoid internally focused UK businesses, although I note the strengthening of sterling and therefore, the potential negative currency effect on some of my non-UK focused portfolio holdings.

Ah yes, this was meant to be an article about my portfolio – here are the headlines:

Q3 performance +27.47%
Year to date performance +52.01%

Round of applause, pat on the back? Well, it was a great quarter for sure, with my larger holdings doing particularly well – IQE, Bioventix (BVXP), Anglo Asian Mining (AAZ), Impax Asset Management (IPX), IG Group (IGG), Zytronic (ZYT) and Games Workshop (GAW) to name a few that have delivered stellar returns during the period. And I have stayed true to my strategy of top slicing these gains to lock in profits, provide portfolio liquidity and compound returns.

If I was a professional fund manager right now, I would be looking to lock in profits and take some volatility out of the portfolio in order to ensure my year-end bonus was secure. But I’m not, so I have the freedom to choose whether to stick or twist. The process of top slicing gains and selling a couple of lower conviction holdings has left me with 32 holdings and 11.57% in cash – here is the full breakdown of current holdings. Given that I am pursuing a balanced portfolio, the obvious step would be to add a bunch of low volatility, large/mid cap dividend shares. The problem is that I’m struggling to identify the best targets – many such shares seem to be out of favour at the moment (a good time to buy them maybe?) and/or do not offer compelling quality/value. I’ve also been noticing that volatility is increasing among many shares in my smaller cap universe – perhaps not surprising if investors are taking some money off the table.

I have no idea whether a market correction is just around the corner but it feels as though a 8-12% market correction (I know, technically it’s not a correction unless it is 10%) would be a useful platform from which this bull run can continue. I’m also watching business results and outlook statements very carefully to try and identify the higher probability winners for 2018. Therefore, I have decided to keep some cash on the side lines for the next few weeks to see what transpires and conduct some deeper research before deciding how to deploy that cash, including the obvious option of buying more of what I already have. I am also keeping an eye on market volatility, exploring how I might use that to my advantage but I’m not going to get too hung up on market timing and intend to be fully invested again by the end of October/early November.

It is stating the obvious to say that winter is coming but whether it brings with it a market correction remains to be seen. Virtually everyone seems to think so, although I don’t know whether that increases or decreases the chances of it happening! For now, I will be content but not complacent with the year-to-date portfolio performance. I remain comfortable with the larger holdings while noting the areas of weakness from a portfolio perspective. Moreover, I am happy to have some liquidity, ready to take advantage of opportunities the market might provide during the fourth quarter.

Happy investing folks!
Simon (Twitter – @BrilliantLeader)


Disclosure – At the time of writing I own shares in IQE, BVXP, AAZ, IPX, IGG, ZYT and GAW, mentioned in this article