My Investment Portfolio Warts and All

Two events have occurred in the past week that prompt this post:

1. My Defined Contribution Company Pension transfer to a Hargreaves Lansdown SIPP has now completed.  The timings ended up being that I sent all the paperwork to Hargreaves Lansdown on the 09 May ’15, received a confirmation letter that it was in progress on the 13 May, the cash landed in my new Hargreaves Lansdown SIPP on the 29 May, I bought all my new low expense investment products (which made this post a little redundant) on the 01 June and the £500 cash back offer landed in my account on the 05 June.  So all in about a month for it all to wash through.  Total Investment Portfolio expenses including SIPP wrapper charges now run to 0.28% per annum.
2. I received a Facebook message from a reader asking if I could do a post with “a really detailed breakdown of my portfolio starting with a rough pie chart with just equities, bond, gold, alternative investments, property etc and then a more detailed breakdown again perhaps an exploded pie chart of the main parts. For example share category American, European shares etc.”  When I read the message I realised that while I've talked ad infinitum about my portfolio over the years I've never given such a detailed breakdown including investment product percentages.

So without further ado here’s my investment portfolio warts and all.

The investment strategy (some might call it an Investment Policy Statement) on which my portfolio is based has now been in place almost since the beginning of my journey.  I first documented it in 2009 but I would suggest reading my 2012 strategy summary (as it included the addition of my High Yield Portfolio (HYP) for a portion of my UK Equities) in parallel to today’s post.  The strategy post will give you the “Why” behind my thinking while today’s post will give you the “What”.  It’s also important to note that nothing I do is original or clever.  It’s predominantly based on work by Tim Hale which is a book that I believe every UK investor should read with tweaks coming from the reading of the following books.

The Top Level Investment Portfolio

Click to enlarge, My Actual Low Charge Investment Portfolio

At a top level the portfolio contains local and International Equities, Commodities, Property, Bonds and Cash.

Buying Gold – April 2015 Update

With Gold well off record highs the mainstream media currently have no interest in the precious as they need sensational headlines.  Even the blogs, unless the owners are predisposed to tin foil hats, are these days rarely mentioning the yellow stuff.  I'm going to mention Gold today though and I can assure you that all tin foil is still firmly located in the kitchen.  I'm mentioning it as I've just bought a healthy dollop.  It was the fourth place I deployed my bonus.

I bought the ETF Securities Physical Gold ETC (Ticker: PHGP) which is physically backed with allocated metal subject to LBMA rules for Good Delivery, has UK reporting fund status, is ISA eligible, SIPP eligible, is priced in £ and has a Management Expense Ratio (MER) of 0.39%.  I paid £77.47822 a unit so with prices closing at £78.12 on Friday I'm up a little.  Not that I'm worried as I am prepared to hold for a long time.

Let’s look at some Gold numbers.

My first chart shows how the Monthly Gold Price in Pounds Sterling (£’s) has changed since 1979.  Over the past year its Price has risen 3.5%.

Click to enlarge, Gold Priced in Pounds Sterling (£) 

Regular readers will know that I despise these nominal charts that are so often presented because the unit of measure they are presented in is continually being devalued by inflation.  Let’s therefore correct for that and show the Real Gold Price in Pounds.

Why I Hold Gold in my Portfolio

In my experience if you’re discussing UK Equities as part of an investment portfolio its validity is unlikely to be challenged and any response is likely to be fairly passive.  A typical response might be something like what percentage allocation do you have.  If you say to somebody that you hold Gold then the responses can be far more variable.  At the extreme they can range from I don’t believe in Gold as an investment as it doesn’t pay a dividend because it just sits there looking shiny to I’m 100% invested in Gold, guns, ammo and tinned beans.

Within my own portfolio I target a holding of 5%.  So why do I hold gold?  It’s for the same reason that I buy property or gilts on top of my equities.  To quote Bernstein’s The Intelligent Asset Allocator it’s simply because ‘Dividing your portfolio between assets with uncorrelated results increases return while decreasing risk’ which is a key concept within Modern Portfolio Theory (MPT).  Bernstein continues with ‘Mixing assets with uncorrelated returns reduces risk, because when one of the assets is zigging, it is likely that the other is zagging.’  The keyword in the first quote is uncorrelated.  In the book he works up some examples to validate these statements.

Let’s run a simple analysis looking to see if we can find an example of gold being uncorrelated with another asset class.

My first chart shows how the Monthly Gold Price in Pounds Sterling (£’s) has changed since 1979.  Over the past year its Price has fallen by 0.6%.  We looked in detail at the FTSE100 last week so let’s use that as a different asset comparator as that dataset is up to date.  Over the past year the Price of the FTSE100 has risen 7.0%.

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Diverting quickly for completeness, as I always like to show charts in Real terms to remove the emotion that comes with the unit of measure continually being devalued by inflation, let me quickly also show the Real Gold Price in Pounds.

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Buying Gold Tax Efficiently

Kitco tells me that Gold when priced in USD’s closed on Friday at a nominal $1,395.50.  Convert that into GBP’s and you’re looking at a Nominal Gold Price of £899.35.  Staying in Sterling that is a Nominal Gold month on month price rise of 6.1% and a year on year price fall of 13.1%.  The chart below shows the Nominal Monthly Gold Price in £’s since 1979.

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If we then adjust this Gold chart for the continual devaluation of Sterling through inflation we can see Real Gold Prices which are shown in the chart below.  If this is of particular interest then you might also be interested in understanding if Gold can protect UK Investors from inflation.  The key Real Monthly Gold Price metrics are:

• Real Gold Peak Price was £1,196.28 in January 1980.  At £899.35 we are 24.8% below that peak today.
• The long run Real average is £544.05 which is therefore still indicating a very large potential overvaluation.
• The trendline indicates the Real Gold Price should today be £515.36 which would indicate even further overvaluation.  

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I’m Buying Gold (Gold Priced in British Pounds – May 2013 Update)

Gold when priced in USD’s closed on Friday at a nominal $1,388.30.  Convert that into GBP’s and you’re looking at a Nominal Gold Price of £912.53.  Staying in Sterling that is a Nominal Gold month on month price fall of 5.9% and a year on year price fall of 8.4%.  The chart below shows the Nominal Monthly Gold Price in £’s since 1979.

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If we then adjust this Gold chart for the continual devaluation of Sterling through inflation we can see Real Gold Prices which are shown in the chart below.  If this is of particular interest then you might also be interested in understanding if Gold can protect UK Investors from inflation.   The key Real Monthly Gold Price metrics are:

• Real Gold Peak Price was £1,199.2 in January 1980.  At £912.53 we are 23.9% below that peak today.
• The long run average is £542.96 which is therefore still indicating a very large potential overvaluation.
• The trendline indicates the Real Gold Price should today be £506.36 which would indicate even further overvaluation.  

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I aim to hold Gold within my own Low Charge Portfolio.  This isn't because I wear a tin foil hat or think that the world is about to go all Mad Max.  It’s because I want to hold commodities within my portfolio as they have a different correlation with my other asset classes and Gold (unlike many commodities for investors) if bought correctly is one commodity that won’t suffer from contango or backwardation.

Gold Priced in British Pounds (GBP or £’s) – March 2013 Update

As I’m writing this post the mainstream media is telling me that Gold, when priced in its globally quoted, currency is trading at $1589.50 an ounce.  In recent times when priced in US Dollars Gold has been tarnishing somewhat (and I used to think that it was only Silver that tarnished).  Compared with the February 2013 average it has fallen in price by 2.3% and compared with the March 2012 average it has fallen by 5.0%.  If you’re an Investor paid or spending in US Dollars then these are probably relevant numbers however as a UK Investor the numbers are bordering on being meaningless.  Let’s therefore have a look at what is happening to Gold when priced in Pound Sterling.  If you’re interested in history the last update of this metric was in January 2013.

The chart below shows the Nominal Monthly Gold Price in £’s since 1979.  The key Nominal Gold metrics are:

• The Nominal Gold Price is currently £1,054.16 which is 0.3% above the January 2013 Price of £1,051.35.
• Year on Year Nominal Gold Prices are only 0.4% below the March 2012 Price of £1,057.94. 

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In contrast with US Dollar Investors we can see that UK Investors are just not seeing price falls.  This is caused by Sterling devaluing against the Dollar at a rate pretty close to the fall in Gold Prices when measured in its globally quoted currency.

Does Gold Protect UK Investors from Inflation

This post is a response to the brief exchange with Faustus on the last Gold Price in British Pounds post.  Today I’d like to attempt to answer the first question which is “whether gold is really as good a hedge against sterling inflation as is sometimes suggested.”

Let’s firstly review why in my opinion it is important not to forget about the damage that inflation can do to your savings.  The Bank of England has a remit “to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%.”  If January 2013 sees the Consumer Price Index (CPI) remain above 2%, and at 2.7% today I see no reason why this won’t be the case, then this will be the thirty eighth month in a row that they have missed their target.  This demonstrates that the Bank of England’s remit actually has nothing to do with the official line presented.  If it did they would have been made sacked for poor performance long ago.  I therefore take inflation seriously.

If you believe that the CPI provides an accurate measure of inflation, and had the Bank of England met their remit of inflation at 2%, then £1 three years ago would have had the purchasing power of £0.94 today.  Instead the current policy employed by the Bank of England, of keeping the patient flat lined at 0.5% combined with plenty of QE, means that your £1 actually only buys £0.90 worth of goods and services today.  That’s a 10% loss of purchasing power in only 3 short years.

I’ve already laid out some techniques I’m using to protect myself from inflation however let’s now look if gold could be added to that list for UK Investors.

Gold Priced in British Pounds (GBP or £’s) – January 2013 Update

This is the regular Gold Priced in Pound Sterling update.  The last update was in December 2012.

The chart below shows the Nominal Monthly Gold Price since 1979.  The key Nominal Gold metrics are:

• The Nominal Gold Price is currently £1,030.03 which is 1.3% below the December 2012 Price of £1,044.09.
• Year on Year Nominal Gold Prices are 3.5% below the January 2012 Price of £1,067.76.  

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The chart below then adjusts this chart by the continual devaluation of Sterling through inflation.  The key Real Monthly Gold Price metrics are:

• Real Gold Peak Price was £1,176.61 in January 1980.  At £1,030.03 we are 12.5% below that peak today.
• The long run average is £528.29 which is indicating a very large 95% potential overvaluation.
• The trendline indicates the Real Gold Price should today be £478 which would indicate even further overvaluation today.  

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Gold Priced in British Pounds (GBP or £’s) – December 2012 Update

This is the regular gold priced in Pound Sterling update.  The last update was in August 2012 and can be found here.

The chart below shows the Nominal Monthly Gold Price since 1979.  The key Nominal Gold metrics are:

• The Nominal Gold Price is currently £1,051.97 which is 2.4% below the November 2012 Price of £1,078.37.
• Year on Year Nominal Gold is 0.3% below the December 2012 Price of £1,055.00. 

Click to enlarge

So over the past year in nominal terms gold has gone precisely nowhere.  This demonstrates nicely one of the negatives of holding gold compared to equities.  If equities go nowhere price wise for a year you can still sleep easy knowing your equities (ie real world companies) are (hopefully) making profits.  Some of those profits are then (hopefully) spun off as dividends, particularly if your allocation to equities is HYP based, which gold doesn’t give you.  That said I’m not changing my strategy and will continue to hold gold because of its diversification benefits.

Gold Priced in British Pounds (GBP) – August 2012 Update

This is the regular gold priced in Pound Sterling update for August 2012.  The last update was in May 2012 and can be found here.

The chart below shows the Nominal Monthly Gold Price since 1979. 

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Gold Priced in British Pounds (GBP) – May 2012 Update

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I haven’t written about gold priced in Sterling since June 2011.  Since that time it reached a new all time nominal Monthly Gold Price high of £1,121 in September 2011 and has since fallen back to £1,003 as of Friday.  All of this action can be seen in my first chart.

For me though, it’s my second chart which corrects for the devaluation of sterling through inflation, that is the important one.  This chart, which shows the Real (inflation adjusted) Monthly Gold Price, reveals to us that the peak in September came within 2% (£1,170 vs £1,151) of the January 1980 real peak before the fallback. 

Real gold today is still well above its long run average of £515 still indicating large overvaluation and if it was to follow the history of 1980 has a long way to fall before a bounce.

Gold Priced in British Pounds (GBP) – June 2011 Update

It’s all very well for me to review the price of gold in USD’s however at the end of the day for a UK investor who will be living in the UK for the foreseeable future it is the price in GBP’s that is really important.  So today let’s review gold when priced in GBP’s.

Is Gold in a Bubble? - Gold Priced in US Dollars (USD) – May 2011 Update

I currently hold 5% of my Retirement Investing Today portfolio in gold.  This is in the form of physical ETC’s “which are intended to provide investors with a return equivalent to movements in the gold spot price less fees” available from the likes of ETF Securities.  This is the commodities portion of my portfolio.  I hold no other commodity types as the vast majority seem to be futures based and previous experience has taught me that issues like contango can really affect the available returns for the Average Joe.

When Money Dies and Gold Priced in British Pounds (GBP) – December 2010 Update

With us living in a world where:

- governments around the world are in an apparent race to devalue their currencies the most through various policies including Quantitative Easing (or as I like think of it, money printing) if you are in the US or UK;

- Central banks in countries like the UK are running crazily low interest policies while allowing inflation to run a ‘little’ allowing the reckless, including the government, to inflate some debt away while thinking they can keep it all in control;

- Europe is implicitly promising to bail out every dodgy Euro zone economy which in my opinion will soon see them also heading down the money printing route to buy government debt; and

- many developed countries are carrying so much debt that it seems inconceivable that they will ever repay it and instead will attempt to inflate away the debt (or maybe forcing bond holders to take a haircut);

I thought it best to start understanding what happens in an economy when inflation rips and disaster strikes. I have therefore started to read the book “When Money Dies – The Nightmare of the Weimar Hyper-Inflation” by Adam Fergusson. This book charts the collapse of the Weimar Republic’s Mark which in 1923 had an exchange rate to the dollar of 4,200,000,000,000 Marks. This was a time when the “Republic was all but reduced to a barter economy. Expensive cigars, artworks and jewels were routinely exchanged for staples such as bread; a cinema ticket could be bought for a lump of coal, and a bottle of paraffin for a silk shirt.”

How long until a house can be bought for 100 ounces of gold?

For a long time I’ve been saying that houses are overpriced. This keeps my family in rented accommodation as I refuse to buy at these prices. Instead I now watch what looks to be the early beginnings of an unravelling housing market from the sidelines. My last UK house price update was here.  Additionally, as I mentioned yesterday while gold is reaching new highs in nominal terms when prices in US Dollars it is not at new highs when priced in British Pounds although admittedly it is close. However, it is nowhere near new highs when priced in real (inflation adjusted) terms and so in my humble opinion still has plenty of upside potential if history is anything to go by.

Gold Priced in British Pounds (GBP) – September 2010 Update

It’s been a while since I had a look at gold’s movements however with it closing at $1,297 on Friday and the BBC writing articles like this which reported that gold had reached a new high of $1,300.07 during trading before dipping back I thought now was probably as good as time as any to review golds prices. Today I’m going to look at its prices in British Pounds though, rather than US Dollars, as this is the currency that matters for me. This is because I’m based in the UK and earn in the UK which makes my portfolio a GBP portfolio in my humble opinion.

Gold Priced in British Pounds (GBP) – July 2010 Update

In real (inflation adjusted) terms gold has stopped, at least temporarily, its steep climb by falling in value by 6.1% month on month (£837.28 to £786.14). Year on year though gold is still up by 30.8%.

Gold when priced in British Pounds (GBP) is however still yet to reach new real highs. Since 1979 we have seen two month average higher real (inflation adjusted) peaks. The first was £867.22 in 1983 and the second was £1,076.06 back in 1980. These peaks are still 9.4% and 26.9% higher respectively than today’s price.

Gold Priced in US Dollars (USD) – July 2010 Update

Within my Retirement Investing Strategy I currently hold 5.4% (down from 5.5% at the last USD gold update) of my portfolio in gold with a targeted holding of 5%. This is a variation from target of only 7% which is relatively small meaning I will not rebalance. Remember also that Gold is the only portion of my portfolio that does not provide a yield (dividends, interest etc). Even though it doesn’t provide a yield and some would even call it a ‘barbarous relic’ I choose to hold it because of its negative correlation with stocks. While one is zigging hopefully the other is zagging meaning I am selling one high while buying the other low. Only time will tell if this strategy will work.

Gold Priced in British Pounds (GBP) – May 2010 Update

In absolute terms gold continues to climb in value reaching a new high of £839.93 (when compared with my monthly historic dataset which goes back to 1979) since gold started its upward climb in 2005. In the last month gold is up £90.32 an ounce however in real (inflation adjusted) terms as shown in today’s chart gold it is up ‘only’ £83.32 per ounce. In real terms that’s an increase of 11%.

Gold Priced in US Dollars (USD) – May 2010 Update

Within my Retirement Investing Strategy I currently hold 5.5% (up from 4.1% at the last USD gold update) of my portfolio in gold with a targeted holding of 5%. Gold is the only portion of my portfolio that does not provide a yield (dividends, interest etc).