It can be exciting thinking about the possible returns of investing in the stock market. That helps explain why some people rush into it and start investing before they really understand what they are doing.
If I was going to begin investing for the first time, here are five things I would like to know.
Costs matter Some investment trusts charge an annual management fee, often a low-single-digit percentage number. Buying or selling any shares usually also attracts fees. They can also sound low on paper, again in the single-digit percentage range.
But a few percentage points here and a couple of percentage points there can soon add up. The more one trades, the sooner such costs are likely to add up.
I would begin by comparing different share-dealing accounts and Stocks and Shares ISAa to see which one looked most appropriate for my needs.
The future is not the past Past performance can be very helpful when investing. For example, knowing how a business did in the past can help me decide whether its business model looks proven and what sort of seasonality it has.
But past performance is not necessarily a guide to what comes next, even for a proven business with a long history. Fortunes have been lost by investors sinking money into fallen giants, only to see them keep on falling.
Chasing yield is a fool’s errand The dividend yield is the amount one receives each year as dividends as a percentage of the cost of the shares.
For example, Diversified Energy currently has a yield of 16%. If that is sustained, spending £100 on Diversified shares today ought to earn me £16 in dividends annually. Even at a time of high interest rates, that sort of yield grabs my attention.
But dividends are never guaranteed. A common mistake when people start investing is simply to look at yields, without understanding the business concerned. A high yield alone tells me nothing. Instead, I need to understand the business concerned and judge how able I think it will likely be to maintain its shareholder payout.
Diversification is simple but important Many people have their eye on what they think is an amazing share when they start investing. Anyone who has ever heard someone in a pub drone on about how they almost bought Amazon or Tesla shares before the companies grew huge, will have experienced this first-hand.
While some companies do well, others perform terribly. There are lots of ways to form an opinion on what is likely to happen – but there is no way to know for sure ahead of time.
By spreading my eggs over multiple baskets, I can reduce the risk to my portfolio if one share I choose later performs badly.
Stay calm Investing involves risking one’s money. The twists and turns of the stock market can seem exciting – or nerve-racking.
Investing is ultimately about making money. I think a valuable lesson when one starts investing is always to stay calm and try to avoid emotionally driven decision-making.
As legendary investor Warren Buffett says: “When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”
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Not entirely coincidentally, this year has seen something of a focus on fitness.
Central to all these activities — well, apart from doing them in the first place — has been a process of data collection and analytics.
Fitbit makes it easy: you can download your personal statistics in spreadsheet format, which makes charting your progress very straightforward. My regular walks have become faster, and easier. They may yet turn into runs. And looking at the 5K data, progress is discernible.
It’s what I do. It’s how I think. And it’s how I approach targeted improvements in other areas — such as our household’s electricity consumption, for instance.
Data driven
You won’t be surprised to learn that I take the same data-driven approach to investing. Indeed, readers with long memories will perhaps remember me mentioning spreadsheets and charts in previous columns.
And it’s an approach I’ve seen taken by other investors, too — some with multi-decade investing experience behind them.
What do they track? What do I track? Whatever we want, in short. Whatever suits our own investment circumstances and strategies, in other words. That’s the beauty of a spreadsheet-driven approach, as opposed to a tool such as Microsoft Money, or one of the proprietary portfolio-tracking tools that are out there.
Nor is the use of the word ‘strategies’ in the paragraph above without significance. I firmly believe that investing should be strategy-directed, and have some of goal in mind. In which case, it is only rational to measure progress towards achieving that goal.
Data that I capture
It’s no secret that these days I’m an income investor. And so, since 2005, my primary spreadsheet has been income-focused, measuring my progress in building up an investment income from a portfolio of individual shares.
The first ‘tab’ in the spreadsheet records progress within a given year: total new cash added, total dividends received, net share purchases, cash at year-end, and some columns of totals designed to inform a number of yield calculations: equity valuation, total new cash, and total bought cost.
Fairly obviously, then, I’m capturing yield as a percentage of equity valuation, yield as a percentage of new cash invested, and yield as a percentage of bought cost. Another column — and probably the least important one — captures profit against the year-end valuation. Finally, a column captures noteworthy comments of the year in question, and I also capture total annual dividend payments by company.
And, as I say, I have all that data and analysis going back to 2005.
Steady as you go
So how am I doing, in terms of investment performance?
Thanks to the spreadsheet, I know. Objectively, not subjectively. Factually, and with real clarity.
Dividend income has increased, year on year. Yield on bought cost is satisfactory. Yield as a percentage of equity valuation fluctuates as capital values fluctuate, but is also satisfactory. And capital values have fluctuated — but then, global financial crises, pandemics, and unexpected national referendum outcomes tend to have that effect.
In other words, steady as you go. I have an investment strategy, and my spreadsheet tells me that it’s working reasonably well.
Other spreadsheets track other aspects of my retirement income planning. Overall, I’m holding the planned course.
Equities still win out
But should you even bother? Granted, retail investors are waking up to these opportunities. But from what I’ve read, it’s wealthier, more sophisticated investors, often with prior bond market experience.
Better by far, I think, is to stick with equities. Plenty of UK blue-chips yield more than bonds and gilts, and also offer capital upside.
Last time I looked, the FTSE 100 was trading on a price-to-earnings (P/E) ratio of 13, and the FTSE All-Share a P/E of 14. America’s S&P 500 20. The broader Russell 2000? 25.
I know where I see the greater prospect of an upwards re-rating.
Why not?
Perhaps you already have such a spreadsheet, designed to suit your own particular needs. I know lots of investors do.
But perhaps you don’t already have a such a spreadsheet — and I know lots of investors don’t.
“It’s too late,” I hear you say. “I started investing several years ago. I’m not sure that I’ve kept all the paperwork.”
No matter: every investing platform that I know of keeps records of investors’ trades — even if they’ve since moved their investments elsewhere. The information is out there, and you can access it, and build your spreadsheet, just as if you’d maintained it right from the start of your investing journey.
Don’t have Microsoft Office? There are alternatives, such as Libre Office. And even a free, online version of Microsoft Excel, maintained by Microsoft.
If the will is there, the means are there. What have you got to lose?
The post Data-driven investing appeared first on The Motley Fool UK.
Over the long term, investing relatively modest amounts in the right way could help me build wealth. Rather than putting lots of money into little-heard-of penny stocks, though, I often invest in FTSE 100 shares that are household names.
I think that doing that can hopefully help me steadily build wealth over the coming years and decades.
Building wealth through shares
Basically there are two ways in which owning a share can potentially reward me financially.
One is a change in its share price. If I had invested £1,000 in Spirax-Sarco shares five years ago, for example, my holding would now be worth £1,820.
The opposite can also happen, though. If I had put £1,000 into shares of Primark-owner Associated British Foods five years ago, that stake would now only be worth £700.
That does not necessarily mean that I would have actually lost money. Share prices move up and down. If I bought those shares in Associated British Foods, the loss would only occur if I sold the shares at their current price. But I could hold onto them, in line with my long-term investing style. It may be that, in future, the share price moves back to what I paid – or higher.
Income generation
A second way in which owning shares can reward me financially is through the distribution of profits to shareholders. That is what is known as a dividend.
Dividends are never guaranteed and they can be cut. Even FTSE 100 shares sometimes cut their dividends. Shell did that in 2020 for the first time since the war. (That is why I always diversify my portfolio across a range of shares).
But one thing I like about FTSE 100 shares when it comes to dividends is that often they can be good payers. Typically, they are mature companies. That can mean they have positive cash flows but limited growth opportunities.
That can translate into some juicy dividend yields. Among FTSE 100 shares in my portfolio at the moment, for example, British American Tobacco yields 8.3% and M&G, 9.8%.
Buy and hold
Rather than taking dividends out as cash, I can choose to reinvest them. That is known as compounding and over the long term it could significantly improve my investment returns.
All of this takes time. As a long-term investor, I aim to buy and hold. Whether buying for growth or income, I take the long view.
To build wealth, compounding dividends can help a lot — especially over the long term. Imagine I invest £100 monthly at an average yield of 9% and compound for 25 years. At the end of that time, I would have a portfolio worth almost £106,000. Not bad for £100 a month!
Whether I focussed on income, growth, or a combination of the two, I would aim to buy into quality companies trading at attractive prices.
U could go to a cash proxy, Government Gilts using a Gilt ladder and spend any returns plus part of your capital 2b secure.
One problem would be if interest rates were low at the time u would have to spend part of your cash fund before investing in Gilts
Option 2.
Your underlying portfolio is invested only for growth, hoping that u have your portfolio has grown enough to pay for your retirement.
U could buy an annuity, where u hand over all your cash for a secure pension.
If interest rates are low so will be the annuity offered.
Canada Life figures show the 65-year-old with a £100,000 pension pot could buy an annuity linked to the retail price index (RPI) that would generate a starting annual income of £3,896. That’s up from £2,195 in the New Year following a 77% spike in rates this year. Oct 22
Option three.
U use the 4% rule, google for details and sell shares at the start of the year and hope that the underlying shares go up in price and not down. U will need a cash fund just in case the market crashes after u start to withdraw your funds.
If the market crashes just before u need your funds, u would use your cash fund and keep everything crossed that markets recover before u deplete your cash fund. As u have to regularly sell shares the law of diminishing returns will kick in but if u haven’t crossed the bar, u should need less income as your age increases.
If u have a million take out an annuity at a resilient time and join the SKI club.
Option four.
Use a dividend re-investment plan, using the dividend stream as a ‘pension’ leaving the underlying portfolio to whoever u like, as it’s your hard earned.
Unaudited NAV per share of 129.07p as of 31 December 2023, resulted in a 17.01p or 11.64% reduction in NAV per share since 30 September 2023, reflecting significantly more cautious revenue assumptions adopted for the next 3 years.
· As capital allocation is focused on cash preservation and debt reduction and given the challenging recent revenue environment, the Board does not currently expect to pay any dividends or carry out further share buybacks in 2024.
John Leggate CBE, Chair, Gresham House Energy Storage Fund plc
£££££££££££
Although a very decent discount to NAV, as previously flagged, not
One obvious point is, there wasn’t a list of Dividend Hero’s 25 years ago but if u had bought MRC 25 years ago your running yield would now be 20% (see below) so every 5 years your capital would be returned. Even better if u had bought some more whenever Mr. Market goes crazy bananas.
Overall then we think this is a good illustration of how a few reliable investment trusts held for the long haul can grow one’s capital and income in real terms. As we noted earlier, ‘real returns’ is a phrase much bandied around these days, but there aren’t many places one can go to test the historical accuracy of any claim to have achieved it.
Conclusion
One of the conclusions of all this is, well you know, that thing we keep talking about. Something to do with eggs and baskets. Diversification matters and as all the examples above show, even a little bit of diversification can help smooth things out, especially as we don’t in real life get to pick the perfect hindsight portfolio.
Second of all, equity income doesn’t have to come from trusts specifically labelled as such. Of course, having such a label puts the onus on the trust to deliver, but adding lower yielding trusts that might grow dividends faster could, in the long haul, pay off.
One just needs to be mindful that higher starting yields today may come at a cost tomorrow, and lower starting yields may pay off eventually, although there are clearly no guarantees.
Last of all, while we noted above that picking 25 years was somewhat arbitrary, that’s not wholly true, as it’s about 25 years ago that investment trusts were confronted by the uncomfortable reality that many of their institutional shareholders had outgrown their ownership of investment trusts and wanted to sell. Boards were, at the time, grappling with a change to the tax rules that opened the door to widespread share buy-backs, wide discounts were quite normal and corporate activity was a seemingly daily occurrence. All of which has quite a contemporary ring to it. But those investors that held their nerve back then did OK, didn’t they?
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
Last week saw the finale of a TV show that never quite broke through to the popular consciousness of UK TV viewers yet is one of the longest running and most successful shows in history. Fans of Seinfeld, which finished in 1998, and Curb Your Enthusiasm, its successor, got to enjoy a finale that wrapped up both shows in an arc that began in the summer of 1989, which is an admirably long period of time to maintain such a high-quality comedy. While this writer has occasionally pondered why the UK has never really embraced these dual masterpieces, the conclusion reached is, just like our dear old investment trust sector, maybe it’s OK to be ‘in the know’. There are plenty of TV shows to go around, and plenty of other funds for those not in the know.
Both shows are built on observing and questioning either real or imagined social conventions and the skill of the writers and performers is in the identification of conventions one previously never stopped to think about, but once revealed, cause an itch that is impossible not to scratch.
With that tenuous link out of the way, one of the most established conventions in investment trusts is that we consider performance first and foremost in net asset value total return terms. As Jerry Seinfeld would say, ‘what’s the deal with that?’ Let’s think about what net asset value total return actually is. One takes the net asset value and every time a dividend is paid, one reinvests that into the net asset value. First of all, this ignores the ‘share price’, which if one was reinvesting dividends in the real world, would be the price one would reinvest at, and second of all, we know that with great reliability any event Kepler hosts with the word ‘income’ in the title always gets a good turnout. This leads us to conclude that not everyone is reinvesting their dividends.
Now, to be clear, net asset value total return is an incredibly useful performance measure, as it is a level playing-field measure of the manager’s achievement combined with any gearing, share buy-backs, issuance etc. So, it is the performance generated by all the parts of an investment trust that are the reason those ‘in the know’ love them. It’s also the standard performance measure for other types of funds where dividends can be reinvested, or accumulated, and thus provides a way to compare investment trusts with other fund options.
Share price total return is, of course, the other measure one can look at, and it is certainly a more real-world measure for those investors that do reinvest their dividends. But what about those that don’t? What is an investor actually getting, and can we easily show whether what they have received has been a success? One of the phrases that keeps popping up in Kepler pieces for extremely good reasons is ‘real returns’. What might an investor in equities for income actually want from such a strategy? Everyone is different of course, but the old saying about ‘living off the interest’ provides us with an idea that equity income investors might have a base case of capital preservation in real terms and income growing a little bit more than real terms. Clearly if one is using equities in this way, a tolerance for some volatility around this scenario is required.
So, to look at this with any degree of fairness, one needs to take a long-term approach and in the following analysis we take 25 years as our time period. This is somewhat arbitrary but it’s certainly a good amount of time for a long-term investor to hold a basket of investment trusts for income, and it covers a host of market-moving events from financial crises to wars through to zero interest-rate fuelled growth and then inflation. This period should then give one a good sense of a buy and hold strategy, which is what we are going to look at.
Let’s start with the example of City of London (CTY), which can fairly be considered a benchmark equity income investment trust, and of course, it holds the top spot on the AIC’s ‘Dividend Heroes’ list, with a 57-year streak of rising dividends. The chart below plots CTY’s share price and dividend growth in nominal terms over 25 years against Consumer Price Index (CPI) inflation. Remember, we aren’t reinvesting dividends, we are considering the share price as the capital value of one’s holding, while the income is being used for whatever purposes the investor sees fit. The two lines show the growth of the share price and the annual dividend, and if one wonders why the dividend line sometimes goes down slightly, this is just due to timing differences between the trust’s financial year and when it pays dividends and our calendar year analysis. CTY really has raised its dividend payment for 57 years. So the chart below shows that the share price has risen more or less in line with the CPI, while the dividend, on the other hand, is c. 186% higher than it was, having grown far in excess of the index’s 86% rise.
CTY: 25-YEAR REAL RETURNS Source: Morningstar, ONS, Kepler Past performance is not a reliable indicator of future results On a technical note, we have chosen to adopt the way the Office of National Statistics shows the CPI index, i.e. everything is rebased to 100. Therefore one can look at the numbers and charts as a way of showing what £100 of shares, say, in 1998 would be worth at the end of the series.
To truly see this in context, one needs to know what the yield at the start of the series was. As we will see later, a low starting yield may be the basis of very strong dividend growth, whereas a very high yield can prove difficult to grow. Somewhere in the middle, where CTY sits, has a good chance of achieving the balance an equity income investor wants to achieve. CTY’s yield at the start of this series, at the end of 1998, was 2.7%. The yield on cost, i.e. the current divided by the original price paid 25 years ago, is 7.9%. For the record, CTY’s current yield if one bought it today is c. 5.0%.
The reason these initial yield and yield on cost numbers are interesting becomes clearer with the next chart. Scottish Mortgage (SMT) of course needs no introduction, but it’s fairly safe to say not many investors these days buy it for income. Nevertheless, it’s quite high on the ‘Dividend Heroes’ table with a 41-year streak.
SMT: 25-YEAR REAL RETURNS Source: Morningstar, ONS, Kepler Past performance is not a reliable indicator of future results Unsurprisingly the share price rather dominates the chart, but the dividend has grown over 300% (the precise figures are in the table further on). An investor 25 years ago would now have a yield on their cost of 4.9%, although one imagines they’d also be feeling pretty good about the share price, recent ups and downs notwithstanding. This is, of course, an extreme example which demonstrates our point that it is sensible to view a trust with an acceptable yield today as less likely to grow that dividend at a startling rate than a trust with a lower yield, which could have the potential for much higher growth, without having made any particular effort to do so. Over the long haul, high-growth companies may start to pay and grow dividends, and it’s notable how many of the large technology companies which twenty or more years ago would have laughed at the idea of paying a dividend are now doing so. The USD amounts being paid as dividends are vast, but the yields are tiny. But in another 25 years?
Let’s broaden the analysis out a little bit and look at three different ‘buy and hold’ strategies that an investor might have considered 25 years ago. This is relatively unscientific, although in all cases we think it’s fair that ‘popularity’ is a selection factor, since by definition if a trust is popular, it will be part of more investors’ overall experience than an unpopular one. For that reason, we’ve relied on the ‘Dividend Heroes’ for two of our three samples. In each case, we’ve picked four trusts, bought and held them for 25 years, making no adjustments or re-weightings. Just a very simple analysis with the objective of giving one a sense of how an investor might be feeling today about how their wealth has grown, or not, in comparison to the cost of living.
The first chart showing this analysis is below, with ‘Basket 1’, the top four dividend heroes. These are City of London (CTY), Bankers (BNKR), Alliance Trust (ATST) and Global Smaller Companies (GSCT). In fact, Caledonia (CLDN) holds the third spot on the list, but was only adopted in the investment trust structure in 2003, and therefore we’ve excluded it simply because it’s unlikely an investment trust investor would have bought it back in 1999. All of the individual performances are shown in a table further on, but to avoid distraction, let us for now just focus on the fact that this strategy has kept the investor well ahead of inflation in both capital and income terms.
BASKET 1: 25-YEAR REAL RETURNS
Source: Morningstar, ONS, Kepler Past performance is not a reliable indicator of future results
The second basket is simply a list suggested by the rest of the research team, having given them some very basic criteria. The picks are JPMorgan Claverhouse (JCH), Fidelity Special Values (FSV), Mercantile (MRC) and Templeton Emerging Markets (TEM) and while perhaps not a wholly obvious group to pick for income, all of these were certainly popular trusts 25 years ago. It would be very disappointing if one gave a team of investment trust analysts the chance to pick four trusts with the benefit of perfect hindsight and not to have outperformed and indeed this basket has absolutely crushed inflation both in capital and income growth terms. An investor today would have a yield on their initial cost of over 20%. Well done team! BASKET 2: 25-YEAR REAL RETURNS
Source: Morningstar, ONS, Kepler Past performance is not a reliable indicator of future results
For the third basket we simply picked four more trusts from the ‘Dividend Heroes’, any of which could have caught the eye of an investor in 1999. Thus, we have Scottish Mortgage (SMT), Merchants (MRCH), F&C Investment Trust (FCIT) and Witan (WTAN). In fact, as the table further on shows, we’ve got a mix of low and high initial yields in this group, which respectively out- and under-perform inflation. But the overall result is, again, a real return for both capital and income. BASKET 3: 25-YEAR REAL RETURNS
Source: Morningstar, ONS, Kepler
While the point of this exercise isn’t really to highlight individual trust’s performance, we anticipate many will be itching to see the breakdown of who did what over the last quarter of a century. There are perhaps a few surprises in the table below. We’ve discussed SMT already, but the figures are notable. Merchants (MRCH) provided a higher-than-average yield back in 1999 and was constrained in the years that followed by very costly debt, long since expired and no longer an issue. It highlights the importance though of getting decisions about long-term gearing right, and how those decisions can echo down the decades. Mercantile (MRC) investors will be very happy with the outcome. While the yield at the start is slightly flattered by the c. 18% discount it was trading on at the time, it’s an example of where a higher initial yield has actually worked very well indeed.
And of course there are a number of trusts one would not have picked back in the day for their income, but again, it just illustrates that initial versus growing dividend balance that investors need to find.
On another technical note, the CPI figure we show is rebased to 100 at the same start date as everything else. The official CPI data series begins at 100 in 2015, with data provided before then being less than 100, we’ve just rebased it to be 100 at the end of 1998.
