In Part1, Part 2 & Part 3 I have looked at my initial idea, expanded that to a wider and deeper base and finally looked at a full on simulation using random selection from a large data set covering 15 years and two market corrections.
Could I more or less randomly pick some holdings with a yield and manage a relatively blind re-investment portfolio ? Would it be successful ?
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Summary
So how do I conclude all this ? What did I really learn ?
First thing is my original idea around slightly unloved, but profitable and higher dividend companies held and re-investing is very sound (to me at least). I’ve around 6 I am tracking and as I divest in my main portfolio am putting funds into them.
My curiosity was that ‘if I pick a reasonable portfolio and don’t select with a keen eye, will I loose my shirt ?’. This is really how this developed.
In writing notes I saw a nice interesting article. Then it got a bit bigger, so two, then three. The complexity of a large data set over a long period of time did rather mess my timing up. In running cross-checks I found errors and it seemed impossible to fix – so actually started with a clean sheet and did it all again with a bit more order, robustness and less options. (A program would have been easier).
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I rather feel I have made my point to myself here.
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- A portfolio generally picked with broad but sensible criteria alone works
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- Be sensible about re-investment
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- Buy only holdings that have fallen in that quarter (there is a clear enhancement to ‘buying the dips’
- Limit the transaction cost impact by only re-investing above a sensible threshold
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- Be sensible about re-investment
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- The noticeable effect of the 2020 correction can be ignored long term – it will sort itself out. But more likely, I would have just held the cash from dividends and not re-balanced
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- it is almost always the case that panic selling fails you – if you did not sell before a correction, don’t sell during
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- The noticeable effect of the 2020 correction can be ignored long term – it will sort itself out. But more likely, I would have just held the cash from dividends and not re-balanced
So in Conclusion:
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- Picking a range of holdings , holding and re-investing the dividend works over a decent period of time
- There is no hard and fast rule here as to how many is a good spread – I would run a statistical simulation but to modify the Excel scheme would be tricky – a lot easier if I wrote a program.
- I would say at least 10 years but anything over 12/13 years looks to be a fairly safe bet
- I would suggest a minimum of 15 holdings and probably 25-30 at the maximum. There has been research to demonstrate that the portfolio effect (number of holdings) diminishes in impact, ie adding 10 holding’s when you have 25 holdings might make a marginal impact, but 5 to 15 holdings quite a large one.
- Picking a range of holdings , holding and re-investing the dividend works over a decent period of time
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- Re-invest with an eye to:
- Buy the dips – there is a clear and material advantage demonstrable to re-investing in holdings that have dropped over the previous period
- Set a minimum to re-invest that is meaningful and limit the number of transactions – the costs mount up and compound (especially over a long period of time)
- Re-invest with an eye to:
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- Balancing holdings by selling off high winners:
- Gives a lower probably output total over time
- Gives a lower variability of output range – or a better way to think about it is a more closely defined range of possibilities
- Lowers the levels of risk as a portfolio does not get unbalanced with a small number of holdings being too large (or too small)
- The purpose of balancing is not to maximise total fund size, but to manage and limit the risk of a small number of holdings having disproportionate impact.
- Balancing holdings by selling off high winners:
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- There is no great magic to many ‘active’ managers (just high fees). They may do rather more sophisticated selection, but in the end, a general random approach on a broad market does work (look how many active funds are absolute dogs and ask what do they do all day ?)
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How could you use this Knowledge ?
Well, you could just do as this method describes and pick 15-25 stocks you feel are solid, spread your investment, collect the dividend and look at a level of selective re-investment and balance over time. Look to sell ones you feel are not going the right way and replace them. As the portfolio increases in value, spread an buy some more. The only real net effect of that will be to group the possible output range further and reduce overall risk. (Note I do not consider covariance – i.e. the impact one holding has on another in the market place)
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- There is a lot of merit to this – those interested in investing will find this a lot of fun.
- The downside risk over time seems to me to be pretty limited.
- The upside looks fairly solid and within limits predictable
- It is unlikely over time you will loose capital (unless you sell out on a correction)
- It is very likely over time, your possible income stream (i.e. taking the yield and no re-investing) will grow in real terms
- There is a lot of merit to this – those interested in investing will find this a lot of fun.
You could apply this also to ETF’s or Investment Trusts, or any level of funds. Personally, I have started to look at a range of Accumulator funds as there is little point looking at yield in a fund that is highly diverse with possibly 1,000’s of holdings. Just re-balance from time to time
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- There is a lot of merit in this for my long term ‘Final Care Cost’ fund – I need do very little to grow 3-5%+ above inflation annually.
My own view about long term dividend re-investment has been to increase income streams above inflation. I do believe that in final retirement, multiple income streams from different sources carrying different risk and performance profiles will work best (no evidence for that but seems self evident really). Someone say 35-40 years old looking to generate base level income over a long time might well consider this a relatively low risk strategy. The purists will bang on that ‘maximum’ growth was missed, but long term income stability is about reducing risk, volatility and divergence of holdings.
I am personally really please with all this effort. I have answered to myself a long niggling question and more importantly I have a clear strategy to apply to a long term income generating portfolio block. (Might now need to update my Personal Investment Policy)
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Would I do this type of analysis again ? yes, but Excel, although good, has a lot of limitations and I found the heavy number of calculations slow. Not complex, but for the 15 year I think it was several million per run. Not efficient. Writing a program in C or Python would actually have been a lot quicker …. next time !
Hope you got something from all this ….
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Note: None of the above is investment advice. It is my observation and comment. Always do your own research and make your own decisions