You may recall that back at the start of October my portfolio was doing particularly well, versus the market. One month on and there are a number of great DIY investing lessons to be learned from October.
At the beginning of October markets were on a knife edge, with the most likely possibility that they would tumble. Unsurprisingly the 80-20 Investor algorithm at that time slightly reduced the risk level of the Best of the Best Selection and took a more domestic (UK focus).
What happened next was fascinating. Investment markets suddenly bounced on 1st October and caught the world by surprise. Having said that, I did highlight it as a very distinct possibility in October's monthly newsletter.
What occurred is what is known as a 'short squeeze'. This is where a large number of investors (usually investment bank traders) bet that the market will collapse. Very occasionally the market, rather than falling under the weight of that money, might actually rise slightly. This causes traders to panic and start buying back into the market in order to close out their bets and limit any potential losses. This drives the market higher and higher in a virtuous circle. When this happens the bounce upwards is usually quite violent.
As a result of this short squeeze October was the best month for stock markets in over 4 years. For example, the FTSE 100 rose 4.75% while America's S&P 500 rose 8.08% as shown in the chart below.
My portfolio's performance
But a pure quirk of fate the day I changed my portfolio (and was therefore out of the market) was the day the market took off. That's just bad luck. However sometimes you are fortunate with your timing as I was earlier in the year when I bought into Chinese equities the day before the market jumped 15%. That's the fun of investing your own money.
So not only did I miss the full market bounce I also reduced my portfolio's level of risk in a month when risk was rewarded. So how is my portfolio doing?
The image below (click to enlarge) shows how my portfolio (green line) is still outperforming the average equivalent professionally managed fund (red line) and equivalent vanguard tracker (blue line) with the same equity exposure. To know how to benchmark your own portfolio like I have read my article How to accurately benchmark your own portfolio.
Obviously you can see that I gave up a chunk of my lead to both benchmarks which isn't ideal but that's just the ebb and flow of investing. Yet in any event I shouldn't be too hard on myself as I am still ahead.
As I always stress, focusing on a process for investing, like 80-20 Investor, frees us from worrying about the things we don't have control over such as the performance day-to-day. That's not to say you won't have periods of underperformance, every sound process will have. Yet focusing upon a process has been shown to maximise the potential to generate good returns over the long-term, as long as it is a sound process such as one based on momentum like the 80-20 Investor algorithm.
Lessons learned
I know a number of 80-20 Investors members will be wondering what would have happened to my portfolio had I not made the wholesale changes on the day the market bounced. Well here's the answer. My current portfolio is the green line and my portfolio had I not made the changes would be the blue line. The two lines are on top of each other until October where they then separate.
Had I not made the wholesale changes I would almost be back to my initial investment of £50,000 which would have been quite incredible to be honest. But I'm not going to beat myself up about it as the market was on a knife edge at the start of October and could have tumbled further.
The above just shows the robustness of the 80-20 Investor Selection as the research behind the Selection allows for the funds to be held for six months at a time. So I'm not surprised that the old Selection performed well. In theory I would have been comfortable holding on to it for six months as it remains a valid selection. However I am choosing to review my funds more frequently than every six months which is why I was happy to change my portfolio. Remember there will be occasions when doing so will also mean that my portfolio suddenly rallies as a result of the changes, as it did earlier in the year.
You should never lament missed opportunities in investing as it causes you to chase them. Stick to your process. Having said that there is one lesson that can be taken from last month and that relates to the risks involved in making wholesale portfolio changes.
If you recall last month I overhauled my entire portfolio yet it was just bad luck that the fund switches were processed on one of the best days for stock markets this year. Of course, I was aware of the possibility and accepted the risks at the time. However, if you are not comfortable with the risks and you want to limit the likelihood of unlucky timing then perhaps just make a few fund switches at a time. This will ensure that part of your portfolio is always in the market. But remember, you can never time the market perfectly.
This month's changes
This month I am making just two change to my portfolio to reflect the changes in the 80-20 Investor Best of the Best Selection and its new global mix.
My portfolio did looks like this:
| Fund | % of portfolio |
| Aberdeen Property Trust | 10 |
| Legal & General Dynamic Bond | 18 |
| Jupiter European | 17 |
| Premier Multi-Asset Conservative Growth | 18 |
| Fundsmith Equity | 10 |
| JPM UK Smaller Companies | 16 |
| CF Miton UK Value Opportunities | 11 |
I plan to keep the number of funds the same but switch out of the Legal & General Dynamic Bond fund and into the Aberdeen European High Yield Bond fund. The latter is back in the Best of the Best Selection and ironically formed part of my previous portfolio. Also I am moving out of Premier Multi-Asset Conservative Growth and into Rathbone Global Opportunities to increase the equity exposure of the portfolio as well as its global exposure.
The rest of the funds are either still in the 80-20 Investor Best of the Best Selection or in the Best funds by Sector tables. The exception is the Aberdeen Property fund but as I mentioned, it's ok to hold funds for as long as 6 months. There is still a chance of the market falling and property funds which invest in actual buildings are a great diversifier. Especially given that the bond market is likely to have a wobble if the US Federal Reserve does raise interest rates in December.
My portfolio now looks like this:
| Fund | % of portfolio |
| Aberdeen Property Trust | 10 |
| Aberdeen European High Yield Bond | 18 |
| Jupiter European | 17 |
| Rathbone Global Opportunities | 18 |
| Fundsmith Equity | 10 |
| JPM UK Smaller Companies | 16 |
| CF Miton UK Value Opportunities | 11 |
This means my portfolio now has an asset allocation breakdown as shown below. The numbers in brackets represent the figures before the above switches were actioned:
- UK Equities 35% (30%)
- European Equities 20% (18%)
- US Equities 15% (5%)
- Global Fixed interest 9% (0%)
- UK Fixed interest 9% (18%)
- Property 7% (8%)
- Cash 5% (6%)
- Alternative strategies 0% (6%)
- Other international equities 0% (9%)
- Japan Equities 0% (0%)
(photo by by Stuart Miles via freedigitalphotos.net)
