Monday, January 31, 2011

Portfolio review #8 - things I don't invest in

Posts 1-7 in this series reviewing the private portfolio sumamrised the assets which I own. This post deals with some things which I do not hold.

1. collectibles: while I do have a few cases of Bordeaux sitting in a bonded warehouse in England, I do not view collectibles (art, stamps, wine, jade, antiques, race horses, comic books, gem stones etc) as suitable investments. They are highly specialised markets, characterised by massive bid-ask spreads, limited transparency, negative cash flows, asymmetrical information, a number of unique risk characteristics and other features which make them difficult and dangerous places to rely on for retirement income. I'll enjoy my wine collecting as a hobby and an investment in future drinking (maybe), but treat the cost as an expense rather than an investment;

2. life insurance: the words "insurance" and "investment" do not go together. Whole of life and investment linked insurance plans are among the very worst investments you could possibly make. That said, I have a very small policy which my parents took out in my name. By the time I had educated myself on the evils of the life insurance industry it had been running long enough that I was better off keeping it than crystallising the losses;

3. time shares: while there are stories of people who enjoy and use their time share, there are many more stories of people who have good reason to regret their purchase. Time shares are generally a very bad idea;

4. gold: I do not understand why gold is a popular investment. It produces no cash flow, has only limited practical uses and is only valuable because people believe it to be valuable. I really don't understand the attraction;

5. holiday homes: I've done the maths over and over again. It makes far more sense to invest the money elsewhere and rent serviced apartments or stay in hotels when and where I want. This is true in terms of the financial aspects, flexibility and the hassle factor;

6. small businesses: I am simply not the entrepreneurial type. I don't have the time and I view owning your own business as risky - especially if you are unable or unwilling to devote 24x7 to making it prosper. I would consider putting money into small angel investments or venture capital situations - maybe;

7. hedge funds, private equity funds etc: historically the track record of hedge funds has been very mixed. It's an increasingly crowded space characterised by very high fees and (often) short lifespans for unsuccessful funds and diminished returns for successful funds. The high minimum investment would require me to overweight any investment which is not acceptable to me (put differently, I'm not rich enough);

8. leveraged FX, futures etc: I do not like investing in anything where the use of leverage or other issues could result in losses greater than my initial investment. That said, I can think of two exceptions. The first is real estate which is positively geared (i.e. there is an expectation that rents will meet the mortgage payments). The second would be IPO financing which would be limited to new issues that I have considerable confidence in - so far I have not done this but I have the facility available should I wish to;

9. property development, timber, farms etc: these are things that I am interested in. I just haven't spent much time looking at anything other than timber (where I did not find anything of interest). Generally the costs and limited (or negative) cash flows combined with the high cost of entry have put me off;

10. actively managed funds and structured products: generally not worth the costs - it is cheaper to use simple products (options/warrants) or do it myself. I have commented elsewhere about abandoning ELOs as an asset class and keeping some CLO exposure as a means of generating better than zero returns on cash but that is about it.

Did I miss anything?


Andrew said...

Hi Trainee,

Thanks for sharing your breakdown. I have a question. Do you take into account how closely correlated your investments are? Excluding property the rest of your investments are almost all equities.

You write you don't like bonds, but adding these to the portfolio can reduce the overall volatility of your investments. Or building up a larger position in commodities as a class as an inflation hedge?

Not that I'm particularly skilled at this - just curious as to your thoughts.


traineeinvestor said...

Hi Andrew

I am concerned about correlation - not so much the "almost all equities" part but the fact that the portfolio (real estate and equities) is substantially focused on HK/China - in effect a single market.

I agree that more bonds would be a good thing to reduce risk as I transition from seeking to maximise returns to a more conservative retirement oriented portfolio - but the yields are pretty awful at the moment (unless I go for AUD/NZD products).

I have some commodities already. I'd be happy buying more but am not convinced that they would provide the necessary hedge given (i) that demand from emerging markets is driving appreciation and (ii) a lot of them are difficult to invest in directly (except bullion) - I learnt about the contango effect on ETCs the hard way.

The other "elephant in the room" is the HKD - USD peg. Impossible to predict if/when it will go or be adjusted but if/when it does happen it will have a huge effect on my position.

As a footnote - I'm not particularly skilled either and have no qualifications or industry experience, hence the "trainee" label.