AU Buffet Index

Friday, 14 January 2022

Reduced my Geared direct share investments

While I normally don't try to "time the market", I occasionally succumb to temptation when it seems there is lots of downside risk and little upside potential. I did that with our SMSF investment in Feb 2020 (when we switched from Vanguard 'high growth' to a 50:50 mix of 'conservative' and 'bond' funds just before the developing global pandemic started to impact share markets around the world) and then again later in 2020 (when we slowly moved back into our long term 'high growth' fund allocation when markets had settled down and started to recover).

I've been watching the markets (at least the Australian stock market) trend fairly flat for the past 6 months, with occasional dips and rises as day-to-day news impacted sentiment, but over that time we've slowly moved from the prospect of interest rate rises to combat the possibility of rising inflation, to a more certain hike in interest rates around the world as inflation appears to have increased on a more persistent basis than the temporary 'spike' that was initially expected to die down.

We also have various potential negative events sitting in the wings - the Russia-Ukraine-NATO/US tension, the China-Taiwan- everybody tension, the Turkey-economic reality tension, any of which (or none) could 'blow up' unexpectedly and trigger a substantial market decline.

Overall, there seems more downside risk than upside potential for the next year or two, so I decided to close out my direct share investments on my Commsec margin loan account. The value today was about $6,000 (around -3.0%) less than it was worth at the end December, but I decided to sell out so I can pay off the $32K margin loan and use the remaining cash to pay off a chunk of my portfolio (home equity) loan.

I retained my investment in the Colonial FirstState Geared Global Share Fund, and we are still fully invested in our SMSF, so it is only a slight overall reduction in market exposure to eliminate the modest amount of gearing I currently had.

I'll have to pay a chunk of capital gains tax on the realized gains, but after suffering a serious hit to my net worth via my geared share investments back in 2007/8 I've decided to trust my 'gut' a bit more and take action when it seems there is considerable downside risk and little upside potential after a period of strong market gains. It is contrary to my 'buy and hold' strategy as a 'long term' investor, but as it is limited to only eliminating the use of gearing I feel it is only prudent.

We'll see how things turn out during the remainder of 2022 and during 2023... I'll either be glad I reduced my level of gearing, or regret 'bailing out'.

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