MoneyWeek Roundup: Bullet-proof your portfolio for the year ahead
James McKeigue Jan 05, 2013
Happy New Year!
Investors were certainly in a cheery mood when they got back to their desks this week. The year started with a surge in stock markets.
Why? Because the US didn’t sail over the ‘fiscal cliff’, as had been feared.
US politicians hammered out a last-minute deal to avoid big tax hikes and hefty spending cuts that would almost certainly have triggered a recession.
Good news, right?
Well, maybe not. As John Stepek noted in Wednesday’s Money Morning, the fiscal cliff edge has merely been pushed back by a couple of months.
The only thing that the rally-inspiring deal actually tackled was the question of tax rises. The bigger problem – how to cut spending – was put off until the end of February. That’s also when the US reaches its legal debt ceiling.
The debt ceiling would normally just be raised. But US politicians are so divided at the moment that there’s no guarantee that will happen.
Instead, we could easily see a repeat of August 2011. Squabbling over the debt ceiling then led to fears that the US might actually default on some of its debt. It also saw the US lose its AAA credit rating.
In short, this looks to be an issue that will unsettle the markets all through 2013 – not unlike the eurozone crisis.
“As an investor, you need to take a step back from all this”, says John. “What have we learned from Europe, or even the UK’s own attempts to cut? It’s that when push comes to shove, politicians would rather not take the hard choices”.
That means we can expect more loose monetary and fiscal policy, which will in turn push up inflation.
Regular readers will know that inflation would be good for gold. It would also benefit Japan, a country whose exports are hampered by a strong currency. In this week’s issue of MoneyWeek magazine, our Roundtable experts discuss why Japan looks one of the best markets to buy right now. If you’re not already a subscriber, now’s a great time to start – get your first three issues free here.
Investing Gangnam Style
Last year, a single video on YouTube received one billion views for the first time ever. The song - Gangnam Style - might not be your cup of tea, but the chances are you heard someone playing it over Christmas.
But what’s it got to do with investing? Plenty, says Tom Bulford in his first Penny Sleuth of 2013.
Now, Tom is hardly ‘down with the kids’. You won’t catch him doing the Gangnam Style jockey dance at his local nightspot of a Friday night.
But he knows a solid investment trend when he sees one. And Gangnam Style is merely the most famous example of K-Pop – Korean pop music. Tom’s been writing about this for a while now, and believes K-Pop could be “the biggest explosion of pop music since The Beatles burst forth from Liverpool’s Cavern Club in the 1960s.”
Originally aimed at “Asia’s super-cool younger generation” K-Pop “is now going beyond Asia and hitting the top of the charts in the USA and elsewhere” – and that means potential profits for one penny share in particular.
Parallel Media Group (PAA) promotes K-Pop concerts in Singapore and Hong Kong. It’s even managed to line up some serious sponsorship from insurance giant AIA. If K-Pop music continues to grow in popularity, Parallel could be well-placed to benefit.
Tom notes that the firm’s chairman, David Ciclitara, “thinks that the shares, now at 10p, are undervalued. He bought shares for himself at 14.92p at the end of October, and persuaded HW Alpha PTE Ltd to take an 18 month option to subscribe for 900,000 shares at 35p”.
At present Parallel has a market cap of about £2m. So “it has hardly had the success of Gangnam Style”, says Tom. “But maybe 2013 will be the year when a little stardust rubs off onto its share price.”
If you’re interested in hearing more on emerging investment trends from Tom, you can sign up to his free, twice-weekly Penny Sleuth email.
How to set your portfolio up for the year ahead
Bengt Saelensminde is also looking ahead to 2013. In his free email, The Right Side, he laid out the perfect asset allocation for the year ahead.
“Asset allocation is the technical term for how you divide your portfolio between different types of financial asset”, says Bengt. Many people say that it’s “the most important thing you can do for your portfolio.”
The trouble is, while that might make perfect sense, it’s not very easy to do without a crystal ball. Even if you thought you could predict the future, it’s inadvisable to chop and change your portfolio too often, says Bengt, because you’ll incur lots of trading fees.
So what’s Bengt’s solution? “The way I see it, what you’ve got to do is say to yourself ‘where would I like to be a few months from here – where am I going with my portfolio?’ Identify a goal and gradually work towards it. Use opportunities as they present themselves and gradually work towards your destination.”
That means you need to be flexible. As a result, one of the mainstays of Bengt’s portfolio is cash. “I have kept a useful amount of powder dry – specifically 25% over the last couple of years. Some in sterling and some in more worthy foreign currencies.”
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But while Bengt feels this stance served him well in 2012, he is now looking to change. “I’m not happy to sit on this much cash as we head into 2013. I think the risks of a major equity blow-up have receded. Of course, the risks are still very much out there – and therefore a decent slug of cash is advisable. But overall, I’m looking to trim my cash to around 20%.”
Bengt is also looking to trim back on the bond and fixed interest part of the portfolio. One reason is that “bonds had a pretty good innings during 2012. And many of the investments are looking fully valued right now.”
As a result, he will be selling some of his best performers to take bond and fixed interest holdings down to 20% of the portfolio from 25%.
Some of the cash that Bengt releases will go into commodities. “Not everyone is keen on commodities. But I am. Especially gold. I’m going to use the current soft price in gold to continue adding during 2013. I’ll be looking at other commodity plays where I think there’s value too. But overall, with the growing allure of gold, I’ll be looking to have 30% in commodities.”
The rest of the freed-up cash will go to equities. Bengt admits that his decision to have just 25% of his portfolio in shares is “quite stingy for someone of my age.” But now he is ready to invest a bit more.
Bengt goes into more detail on each asset class, so do read the piece in full. And if you like what you’ve read so far you can sign up to Bengt’s free Right Side email.
What will house prices do in 2013?
One popular asset class that Bengt didn’t cover is property. In Thursday’s Money Morning, John ran the slide rule over the sector. “UK house prices have gone virtually nowhere over the past two years”, says John. “According to the Nationwide, over the course of 2012, prices fell by 1%. That follows the 1% rise seen in 2011.”
Those national averages hide plenty of regional differences, concedes John, but “all the same, overall, the UK property market has probably been one of the least exciting asset classes of the past couple of years.”
Will this continue in 2013? The government hopes so.
“The government and the Bank of England are doing their very best to keep prices propped up. Interest rates remain extremely low. And the Funding for Lending scheme actively encourages banks to borrow cheap money to lend back out to homebuyers.”
But there’s a limit to how much propping the government can do, says John. At present it’s just making houses easier to buy for people who’ve already got the money. So it’s not boosting demand by that much.
“There are lots of people renting properties just now who would like to be able to buy. But the size of the deposit required is making it nigh-on impossible for them to do so.”
Moreover it doesn’t seem likely that it will get easier for these people to save up a deposit anytime soon. “Wages are still rising more slowly than inflation. And the Bank of England seems intent on finding more excuses to ignore inflation this year.
“There’s lots of talk of ‘nominal GDP’ targeting floating around (which is essentially an excuse to allow inflation to rise above the current 2% target rate). That means people will have even less disposable income available as each year passes.”
Given the government’s obsessions with supporting house prices, you never know what scheme they’ll come up with next. But even so, says John, “we certainly wouldn’t be rushing out to invest in buy-to-let property”.
There’s never been a better time to take control of your investments
One major financial event happened over the New Year that had nothing to do with the fiscal cliff, or the plunging yen, or any other market for that matter.
The Retail Distribution Review – or RDR – is finally here.
Financial advisers are now no longer able to take commissions from financial services providers for selling most investment products. That’s great news, and a change we’ve spent many years campaigning for.
However, it does mean that the cost of financial advice will become much clearer. In turn, that might mean you get a nasty shock the next time you think about consulting an adviser.
So there’s never been a better time to make sure you understand the basics of investing. Even if you don’t want to take complete charge of your own portfolio, it will pay to make sure you are an informed consumer of financial services.
Look at it this way: you might not want to fix your car by yourself, but you know that you feel an awful lot happier if you have at least a rough idea of what’s wrong with it before you take it into the garage.
So if one of your New Year’s resolutions is to take more control of your investments and brush up on your financial knowledge, then sign up for our free email MoneyWeek Basics – it’s a series of around 50 emails, covering everything you need to know to start investing with confidence.
Also, take a look at my colleague Tim Bennett’s weekly video tutorials. Tim has kicked off 2013 with a video on the shadowy world of interdealer brokers.
• This article is taken from the free investment email Money Morning.
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