How I invest: Profiting from the stock market dip
Aware in February that the coronavirus pandemic could cause a severe market correction, John from Reading and his wife decided to shift around a quarter of their portfolio into cash.
Having retired eight years ago, John says he and his wife would normally keep around two years’ worth of living expenses in cash.
Their overall investment goal is to ensure they can enjoy retirement and pass on cash to their children and grandchildren on an annual basis.
They use the FTSE 100 as a benchmark for their portfolio, and John says they are ahead of that index by about 60% over the last eight years, albeit not adjusted for any dividends received.
BUYING THE DIPS
When in February it looked like an impending stock market crash was on the way, the couple decided to increase their cash position substantially, either to ride the storm without worrying too much or to be able to buy shares they liked at a lower price in the future.
As it turned out for John, the dips certainly came, so he took advantage of the prices coming down, choosing companies that he had ‘hoped to invest in at some stage anyway, but where we had missed the boat’.
John also bought exchange-traded fund iShares Physical Gold (SGLN), ‘as every commentary said we should hold some gold’, though he only held the ETF for a month, realising a gain of around £3,600, which ‘seemed worth taking’, in his opinion.
The couple say their usual investment strategy is to buy and hold momentum stocks, looking for capital gains and ignoring dividends completely.
When judging when to take a profit, they consider not only the size of the gain, but also the time period over which it occurs, with the view that a 10% gain over one month is better than a 30% gain over a year.
John concedes this means they sometimes get out too early but adds that they usually temper this by top-slicing, i.e. selling some but retaining a stake at the original cost.
He explains, ‘An example, we were lucky to buy Novacyt (NYCT:AIM) at 77p on 13 February. Having bought 13,034 shares initially, we then sold 4,396 shares at 455p on 9 April and a further 4,281 shares at 467p on 16 April. This provided a total gain of about £33,000 on an investment of £10,000, while still retaining 4,357 shares. That is a once in a lifetime event, surely!’
John and his wife currently hold around 60 shares in their portfolio, with another 40 on their watch list.
Keeping tabs on the shares in their portfolio every day, John says he and his wife soon saw some very quick gains as the market recovered from its March low, and so they quickly banked profits. ‘For example, we bought housebuilder Vistry (VTY) on 15 April, then sold on 17 April, gaining 11% in two days.’
He then bought Vistry again on 21 April and sold on 23 April, gaining another 14% in two days that time. John stresses such rapid dealing is not his usual way of operating.
When he retired, to help manage his portfolio John devised a method of measuring a share’s momentum and volatility, which he calls ‘bandwidth’.
Looking at a share price chart, bandwidth is defined as the width of the upper and lower average lines, measured in months, using the last three years as a reference. The narrower a bandwidth, the steeper the incline and the less volatile the share, in John’s view.
He sees momentum as a good way of achieving capital gains, believing that the selection of momentum stocks with low volatility improves the chances of achieving growth with the ‘minimum of rude shock’.
WHAT HE AVOIDS
The sectors he avoids are miners, oil, banks and utilities as he argues ‘events beyond their management’s control can distort their share prices significantly’, adding that they wouldn’t meet his criteria anyway as they currently lack momentum.
John doesn’t invest in any funds, preferring UK-listed shares. He says: ‘I see no real reason to pay charges when, as I hold about 60 shares, some of them will be held by funds too. I have used ETFs in the past but only if I am short of ideas.’
Whilst John says lockdown can be ‘tedious’ at times for himself and his wife, the extra time made available has been used to some effect.
‘We would not normally buy and sell quite so often. It does create quite a lot of time-consuming paperwork, but time is what we have plenty of at present,’ he explains.
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