Two months ago, I had 32 holdings including 11.57% in cash and I was considering my next move (you can read the full article for a recap of my thinking). There was the safer option of reducing volatility by adding large/midcap income shares or going for growth on the basis that this bull market has more legs. I also speculated that a market correction would be useful in order to take the heat out of valuations. That correction hasn’t happened yet, although in the UK there have been some signs of “PE Contraction” with a fair few sharp falls among some popular growth/momentum shares during November. However, the US markets from which we often take our lead, continue on a raging bull run.

Review and Cull
I’m mindful that it is better to spend time in the market rather than trying to time the market but that’s often easier said than done, especially when valuations are expensive. I spent much of October reviewing my existing holdings against tightened criteria and in particular, I reviewed their defensive/moat qualities along with 2017/18 performance prospects. This took me down to 24 holdings and c21% cash. Those culled include Tristel (TSTL), Petards (PEG), Stadium (SDM), Acal (ACL), Bloomsbury Publishing (BMY), Beximco Pharma (BXP), Bodycote (BOY) and TT Electronics (TTG).

Diversified Income
I’ve now started buying this past week and currently have 37 holdings including 5.34% cash. Did I stick or twist? The full portfolio holdings/weightings can be viewed here but for those of you who are on the edge of your seats, the answer is that I mainly decided to stick by buying low volatility income shares. I have added a mixture of large/mid cap UK quoted companies alongside a similar number of investment trusts to provide additional diversification. There are now 20 holdings in the Income Portfolio (weighting is 33.2% of overall portfolio) with an average 2018 forecast yield of 6%. Just as importantly, these holdings are well diversified with low volatility (1x speculative, 3x Adventurous, 7x Balanced, 9x Conservative). My plan is to add significantly to this portion of the portfolio during 2018.

On the subject of building an income portfolio, it would be remiss of me not to mention the excellent blog series written by @wheeliedealer – it runs to 7 parts and offers some sound guidance and excellent insights.

New Benchmarks for 2018
Another change that I’ve recently made is to switch my internal benchmark fund from Invesco Perpetual to Fundsmith Global Equity. Additionally, I now have the advantage of holding a number of investment trusts which I will be monitoring collectively as a secondary internal benchmark. As for an external benchmark, I will be moving to the FTSE All Share Total Return Index. My thanks to Stock Whittler (@dosh100 on Twitter) for making me think deeply about this topic.

Going for Growth
I have decided to dispense with the Special Situations portion of the portfolio from 2018. I don’t really play in the pre-profit playground, the deep value undergrowth or the recovery graveyard these days. Therefore, I’m going to simplify my strategy into Growth and Income and move the three current special situation holdings into the growth portfolio. This currently amounts to 15 holdings, including the Fundsmith Global Equity holding and accounts for around 60% of overall portfolio value.

While the income portfolio is well diversified and low(ish) risk, I think it is fair to say that the growth portfolio is much more concentrated and significantly higher risk. Given the 60% weighting, it is this segment that will largely dictate overall portfolio performance. Moreover, the top 2 holdings (IQE and Anglo Asian Mining (AAZ)) account for 26.5% of overall portfolio value. As 2018 unfolds, I anticipate normalising both of these holdings to a more realistic and safer position size. Hopefully this will be at a decent profit from today’s value but there is clear and unmitigated risk with both of these holdings.

Indeed, I haven’t really finished with the construct of this segment of the portfolio and I will be making some further changes/additions over the next couple of months, some of which will likely coincide with reducing the position sizes of IQE and AAZ.

And finally…
The Curious Case of the Imperfect Hedge

Some readers and Twitter followers might have noticed my reference to hedging during October and November. The product I am about to mention is super high risk and definitely not for widows, orphans nor indeed, for any sane person.

Hedging is hard enough for anyone to get right but the challenge is exaggerated when one does not have a spreadbet/CFD account. The only way to hedge via a normal share account or SIPP is to use an artificial ETF (exchange traded fund) that is aimed at mirroring a particular index (both short and long options exist) – incidentally, many of these ETF products are not available in ISAs. The index that was of particular interest to me was the Volatility Index (VIX) which is inversely correlated with the S&P 500 index. Clearly this is an imperfect hedge because I don’t hold any shares in S&P 500 companies but my rationale was that when the US market sneezes, the rest of the world catches a cold.

I bought two tranches of a product called Proshares Ultra VIX Futures (UVXY) which provides 2x leverage of the VIX. Since opening these positions, the US markets have gone from strength to strength and I am seriously underwater (30% down as it stands, although I have been down as much as 37%). With hindsight, it was probably a bad idea to even think about this product but I’m treating it as an experiment. I am fast reaching the conclusion that the best hedge for most private investors is simply to have a well diversified portfolio. I will keep readers posted when/how the hedge experiment concludes but I am not hopeful of a profitable outcome.

If this turns out to be my biggest mistake of 2017, I’ll take that (cue IQE, AAZ, BVXP profit warnings and the collapse of Fundsmith). I jest of course but I am ever mindful that the next profit warning is just around the corner and we should never take anything for granted in the markets. As the year end approaches, it will be interesting to see if we get a Santa rally. Personally though, I am more interested in trading updates in December and January to provide further insight into which companies are set for outperformance in 2018.

Happy investing folks!


Disclosure – at the time of writing, I own shares in Fundsmith Global Equity, IQE, Anglo Asian Mining (AAZ), Bioventix (BVXP), Proshares Ultra VIX Futures (UVXY) which are directly mentioned in this article. For transparency, my current portfolio holdings at the time of writing can be viewed here.