Here’s something a bit different that I thought Readers might like to look at. A good friend has been investing for maybe 5 years and lately he has found things a bit hard going and wanted me to have a look over his Portfolio and give my views on what I thought of it. For obvious reasons he must stay anonymous but I am sure he is reading this - so ‘Thank You’ hugely from me and on behalf of Readers for letting me share this.
For simplicity, I have just listed the current holdings and the £ note value in each one at this point in time - some are in loss, some are in profit, but to a large extent what matters is where we are now:
ALU - £356
AHT - £523
BLT - £680
CEY - £661
CPG - £1120
DPLM - £720
EZJ - £834
ESP - £565
ETO - £1409
GMS - £453
GVC - £945
ISF - £5906
LLOY - £694
NII - £311
OPG - £403
PAYS - £1087
PLND - £335
PRES - £174
RIO - £1784
S32 - £22
TEP - £957
UTW - £1532
Total - £21,481
The Portfolio is currently down 15% on the Buy Prices overall and this is obviously why my friend is concerned.
Here is the text of the email I sent him back on around the 2nd January 2016 ish (I have done some minor tweaks to the original text to protect the innocent):
I have had a good dig through. In many ways there is a lot to like here - I think to some extent you have been 'unlucky' not stupid or anything - in fact you have done an awful lot right.
I like the fact you have a lot of Stocks - this in itself lowers Risk and with the coming year probably going to be hard work, this is a very good thing. On the whole you seem to have Quality businesses and none of that AIM 'WheelieBin' crud, although many of your Choices are probably High Risk and this is where the Problems are coming from. On the flipside, you hold a lot of really good stocks - and all these need is patience - I suspect it is the desire for 'action' which partly makes you think you have done something really wrong. It is vital to think Long Term and be prepared to sit on your hands and do nothing for months and months if that is what is the right thing to do.
Despite having many Stocks, as I hinted above you are probably not all that well diversified. In future, when considering buying any new Stock, think about how it fits into your overall Portfolio and try to get a mix of things across Sectors and investing styles (Momentum, Value, Growth, Quality, Defensive, etc.).
You have quite a lot of Stocks that are dependent on Commodities - direct or indirect. e.g. CEY, RIO, BLT, S32, are direct and stuff like GMS, PRES, ISF, OPG are to some extent linked to similar forces that drive commodities. The knee-jerk reaction here would be to sell all of these but I doubt that is a good idea. To some extent we have probably seen the worst of the commodities meltdown and even though they will most likely fall more, we are closer to the bottom than the top. Selling now just means getting out of the Elevator at the ground floor - just before it goes back up again !!
I think this year will be tough - therefore something to think about is how to build a Cash Pile so that you can buy XUKS ETF to enable you to Short the FTSE100 when it goes up higher - this will Hedge your Portfolio and will be very important this year I think. To a large extent this year is about Capital Preservation - we should not be expecting to make much (if any) Money this year, but we must avoid losing much. I see you have ISF and I think this is a Long FTSE100 ETF - so the easy thing for you is to wait for the FTSE100 to move up nicely and then Sell the ISF and buy a XUKS.
Assuming you have some spare Cash coming in from Work which you can invest at some point, probably the best thing to do is not change your Portfolio all that much and to Average Down with new Cash or with stuff you have sold in future, so that you can ride some of these Stocks when they get back into Uptrends again. In your email you talk about dumping everything and starting again - I doubt this is the best action - I think anything with Stocks needs to be carefully and slowly thought through and small incremental tweaks are better than radical changes.
In terms of Position Sizes, I notice you have quite a few that were probably around £500 ish when you bought in. The problem here is that your Dealing Costs (Stamp Duty, Commission, Spread) will be a sizeable drag on your Returns - you need to minimise this drag. For example, if your Dealing Costs are around £30 all in, then a £500 Position needs to grow 6% just to breakeven. If you invest £1000, then it only needs to grow 3% - this is very important and I suggest that you now have a Rule where you say the minimum Investment you will make is £750 or perhaps £1000. With £20k there is no reason why you could not do £1000 minimum position size. It is surprising how Costs add up over time and if you think about it, Costs to an extent are one of the few things with regard to Stockmarket Investing that you can control - so many things are totally out of our control. The principle here is to Control what you can Control and don't worry too much about things not in your control.
OPG - Very risky but not awful. It is a difficult one, I would not have bought it but I think you might as well hang on to it and ride it out. To a large extent (like all of it really) this is a decision for you. Maybe put a Stoploss on it - sell if it goes below 65p (there is strong support just above this level).
CEY - I really don't like this and think this could be trouble for you. I would probably dump it. Gold Price is awful and likely to fall more (at time of writing this it is bouncing but I think that is short lived - the overall Major Trend is down). Egypt is a bit messy and this doesn't help. Maybe use a Stoploss - if falls below 55p then dump it.
ETO - We all know this has had problems, longer term I think it will be fine and has a lot of Value, I would continue to hold.
GMS - will probably go lower, Oil dependant obviously. Long term should recover and a lot to like. I would hold on - it's not a huge position for you anyway.
NII - downtrend and risky - but again it is a small position so you might as well ride it out.
RIO - could fall a lot more - probably one to ride but expect pain !! At some point these things will turn up again - and you can almost guarantee that if you sell it now, it will start to recover almost straight away.
PLND - you have been unlucky here really - but these things happen. Might fall a bit more but I think you should ride it out.
PRES - no point selling now - there is a lot to like and when Oil turns (may happen late 2016), it should start to recover and you could buy more then.
S32 - I can't see much point in holding this - the Position is miniscule and it is not something you should add to - maybe you should just clear it out of the Portfolio. Annoying that the Dealing Costs will take a lot of the value, but we are where we are.
TEP and UTW will be fine and they both generate nice Divvys for you.
It is obvious that you could face more falls on these Stocks this year - but the best way to manage this is to use XUKS to hedge out some of that downside and to build Cash over time. I would hold off buying anything for a while and let things play out. Just focus on using XUKS to hedge and not letting it get to you !!
I hope that helps, feel free to question anything.
I then followed this up with a second email after my mate had replied back:
“Glad you liked the feedback - as I said, I don't think you are massively off track, some fairly straightforward changes should get you in a much better place going forwards. 5 Years into Investing is still early days and it does take a long time for it to really 'click'.
I probably have a similar issue to you on Cutting the Losses - it sounds easy in theory but hard in practice. My View is that by very careful Stock Picking and by having good Diversification across different things, you can avoid a lot of the Losses and letting Winners run and adding to them can mean that the Losers have less impact over time. With Quality Stocks I find that even if they struggle in the short term, eventually they turn around and do well - you can top them up when they are on the mend. In fact, many of my biggest Winners started off as total duffers.
It sounds like your aims are realistic - I see no reason why you cannot make 10% a year once you get more into it - that should help a lot over time. It is important to view Investing as something you will probably do all your life - especially if you enjoy it which appears to be the case.
Anyway, good luck for 2016 and onwards !!