Page 41 - DIY Investor Magazine Issue 24
P. 41

 • Retail Bonds issued on the LSE’s ORB exchange have been popular with DIY investors but issuance has been rare; some have been tempted, and devastated, by the siren call of unregulated ‘mini bonds’ - to be avoided at all costs.
• A better choice for the DIY investor may be bond funds.
• Beware ‘duration risk’; don’t choose bonds that mature
in more than 5-8 years that are vulnerable to changes
in interest rates.
• Generally avoid foreign bonds unless you really
understand currencies.
• Another rule of thumb, is the ‘age-old rule’. Aged 30,
30% of your portfolio should be in bonds; at 60, it should be 60%.
Property: Do you want to buy a property outright or invest through a Real Estate Investment Trust – REIT – a company that invests in property?
Each option comes with advantages and disadvantages, but can find a place in a well-built investment portfolio
If you are comfortable using debt you can dramatically increase your withdrawal rate from your portfolio because whereas inflation erodes the ‘real’ returns on your other assets, a property itself will generally keep pace with inflation.
If you use your capital as a deposit on a property and raise a loan on it, you have a leveraged position on a generally appreciating asset; so, why not invest 100% in property with cheap mortgage money?
Direct property investing is generally more ‘hands on’ than owning shares and bonds, and its tax treatment changes often; if the property market tanks, the loss is amplified, and on an inflation-adjusted basis, the long-term growth in stocks has always beaten property.
Saving money and investing money are very different; even with a diversified portfolio generating lots of cash each month, it is vital to have enough available savings in case of emergency. The precise amount will depend on your outgoings, debt, and influences such as your health and your credit score.
This is where it gets personal; asset allocation is down to your personal preferences, risk tolerance, and whether or not you can tolerate a lot of volatility.
The simplest income investing allocation would be start with:
1/3 of assets in dividend-paying stocks.
1/3 of assets in bonds and/or bond funds.
1/3 of assets in property
And then adjust it according to your personal circumstances and preferences; these are likely to change over time, and whilst an income portfolio should never
be gamey enough to keep you awake at night, it is good practice to schedule a regular portfolio review.
None of these decisions are to be taken lightly because any error or missed opportunity could have a direct bearing on the income investor’s quality of life at a time when they may be at their most vulnerable.
A large number of income portfolios will be showing hefty paper declines because of the recent sell-off; the FTSE 100 gave up 35% of its value in just over a month.
However, as we know, it’s a marathon not a sprint; most will recall the Global Financial Crisis and the Dotcom Bubble, and many will remember Black Monday – or even blacker Tuesday when the FTSE dived by 12.2%, still it’s biggest decline – yet markets have always come back.
As long as you don’t need instant access to your cash, those losses can remain uncrystallised until the market comes back; the key is not to panic, and if you can manage to remain disciplined so as not to eat away at your capital, your income portfolio should be the gift that keeps on giving.

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