I’m fairly certain I have written a similar Blog to this many years ago and I think it might have been titled with the use of the word ‘Roadmap’ or something; but I can’t be too motivated to dig it out and I don’t think it will hurt one little bit to scribble out something new which might have some additional thoughts in it and certainly is in tune with the current zeitgeist.
However, I have been enthused to write this because the recent plunge in the Markets and the behaviours and activity I have witnessed on Twitter etc. have highlighted to me that so many People do not have any kind of Strategy and even less do they have a Flexible Plan that is able to adapt fairly quickly to changing circumstances. There doesn’t seem to be a lot of thinking ahead yet it is vital that you do this. The most obvious manifestation of this is that a large number of People are clearly ‘Uber Bulls’ and they in essence remain pretty much 100% Invested whatever the Markets do. This has proven to be a very profitable and wise approach for the last 12 years of a rampant Bull Market, but the idea that this will always be the case is in essence very naïve and dangerous.
I’ve been meaning to write this hopefully fairly short Blog for a while but I keep getting distracted onto other things and we actually discussed this on a recent TPI Podcast so I wasn’t feeling a huge need to get it written. Having said that, we didn’t go into a comprehensive coverage of the issues and there is always a sense I have that I should try to cover as many topics as I can within my Blog Archive, so that WD Readers can revisit it in the future if they want to know about something. Maybe new Readers might find it useful also as the whole WD thing should really be to help Newbies as its main Sultana d’Etre (should that be ‘Raisin’?).
The essence of the ‘problem’ with my Income Portfolio is that my original theory behind it was to generate an Income Stream from the Dividends that was at least 5% a year based on the starting position each year. Apart from other aspects such as low activity and low risk and the diversification benefits, part of my thinking was that at some point in time in the future, I might have grown the Income Portfolio enough so that it would be throwing off Dividends that might amount to maybe £6,000 a year or so and that with other Income sources I have, I could get to a position where my Yearly Spending needs on food and rent and stuff are covered without me having to sell any Shares or make any money on Spreadbets etc. It is simply easier to just take Dividend Cash out of an Account than to have to think about which Shares to sell and all the timing issues and suchlike.
In a recent TPI Podcast we talked at length about a potential Stockmarket Bubble and I also wrote a bit in a Weekend Charts Blog. Both times I think I promised to write a more detailed Blog specifically on the subject and in theory as I start writing, this Blog is intended to fulfil that commitment. You can find the Podcast here by the way:
First off I must make it very clear that I am not saying a Bubble is definitely going to happen; nobody can foresee the future (least of all me !!) and all we can realistically do is to assign probabilities to possible future outcomes. Using such an approach, I would guesstimate that perhaps a year or more ago, I would have said that a Bubble was a very low likelihood, perhaps something like 5 to 10%. The fact is that Stockmarket Bubbles are very rare and hence a low probability is appropriate, but with the various factors that I will get onto shortly, I would now say that the probability has risen to perhaps 15 to 20%.
Well, 2019 turned out quite a ‘funny’ year where we had untold (or, more accurately, told far too much !!) political farce and a very nervous Market, yet by 31st December 2019 most Markets had rallied hard and the US Market in particular was truly incredible. To give a bit more colour to that statement, the Table below I worked out as I do every year using the Start and Finish Numbers for each Index from SharePad and this shows exactly how well the Markets performed. Please note this does not include Dividends, so for example on the FTSE100 you need to add about 4%, bringing the Total Return up to about 16% and for the FTSE250 you can add about 3% to give a Total Return of 28% - that is pretty impressive !!
Of course there are no Costs in here so in reality when you run a Portfolio you will get some drag from Costs such as the Dealing Fees and Buy/Sell Spreads and the Stamp Duty. Using ETFs you could get nearer these figures as the Costs are often extremely low (see the ‘Funds’ page of my Websites).
Needless to say if you have not read Part 1 yet then it probably makes sense to go back to that one first before you start on this one. You can find it here:
Anyway, I was going through various Bullet Points around the subject matter concerned and here are the next bunch:
I am bashing out this blog as a result of a conversation with a mate which was along the lines that he finds it hard to hold things for the long-term and tends to bottle it at some point and end up selling when a decent Profit has built up; but often this might not be the best approach. Even a bit of a numbskull can figure out that if you continually sell Stocks after making perhaps 40% Profit, you will never ever get gains of 200%, 300%, etc., which are the ones that really transform your overall Returns.
Buying high quality Stocks and then holding them for long time periods has many advantages and of course many drawbacks. The benefits are really around ease of execution and low activity; which of course can lead to lower Dealing Fees and costs, and effort around selecting Stocks and general Portfolio Management activity.
I often think of subject matter that is way too short to justify its own blog, yet at the same time far too long to just send out via a Tweet and also I would like to store such stuff in the Website Archives so it can be retrieved by anyone who wants it; and of course with Tweets they tend to be quite ephemeral and soon lost in the River Twitter. On the basis of that, I am envisaging that this blog will cover a few possibly unrelated subjects but at least they get captured in ‘black and white’ electron imagery for the future.
Stay in control of your Position Sizes
This is something I see so often and I know I have fallen into this trap many times myself in the past. It’s a very simple concept where we buy into a Stock, and we quite like it, and we give it perhaps 4% of our Portfolio and then we leave it to do its stuff. Then it turns out that this one is a real beauty and it keeps steadily pushing higher and after a period of time we find that it has grown to be much larger and could even be up to 12% or our Portfolio or more. If we have a very focused Portfolio with maybe just 10 Holdings or something, then a Stock like this could easily grow to be 20% or more.
I am approaching an important and significant milestone with my Investing activities where I will need to start taking Cash out of my Main ISA Share Account in order to have dosh for my day to day spending needs. In this blog I intend to go through the implications of this and to look at best ways to manage any Drawdown so I get out the Cash I need to eat but also so that I still achieve decent Investment Returns and manage to compound gains as much as I can but obviously removing Cash reduces this beneficial effect. I am pretty sure that careful management of the Drawdown process should mean the impact on Returns is not too hefty.
I have now been ‘retired’ for pretty much 10 years (by the way, today is my second birthday – 21 years since my Bike Accident !!) and up until now I have had Cash and Investments outside of my ISA Share Accounts which I was merrily spending through but that source is drying up. I still have a big chunk of my overall Wealth in a Prudential With-Profits Bond but I see this as a bit of a ‘rainy day’ kind of thing and in a way it is for ‘emergencies’ such as if we are in a horrible Bear Market when I can’t see obvious ways to get Cash out of my Share Accounts. Fortunately over those 10 years my Main ISA has grown a lot.
I am breaking all the well established ‘Rules’ of Blog scribbling with this one as I am going ahead without a plan and half watching the Lionesses in the Semi-Final against the USA which is very distracting (I am sure if I was watching the Men’s game I would be able to focus almost 100% on the Blog because it would be extremely dull as Men’s Footie often is).
I got the idea for this Blog from a fairly new chap to the Markets who strikes me as very much in the early stages of trying to figure out what the hell is going on (don’t worry, you will always feel like that, even after 20+ years with the Markets forever throwing up new tricks and challenges) and getting drowned in the sheer Wall of Noise that just bombards us. It is by no means a Blog subject I have not written about before and I intend to include Links at the bottom to several related Blogs on the subject which should help understanding (oh boll*x, the US have just scored a second goal……).
A continuing mantra you will hear and read from me is around the value that talking to other experienced Private Investors and Traders can provide. In addition, I find this is widely under-appreciated and it is probably the biggest source of Learning that I undertake these days. Indeed, undertaking the TPI Podcasts venture and being able to discuss countless aspects of Investing with someone as talented and successful as @Conkers3 is a huge help to my thinking with regards to how I go about things.
This can be on different levels - probably the main focus for me is to hear the techniques and methods other Investors use and these discussions bring ideas for potential ways in which I can tweak how I go about things in order to improve my Results. On another level, and probably of less interest to me, are the views of other Investors with regards to which Stocks they are invested in and what their take on certain Stocks is. Of course this can be hugely dangerous because it is immensely ‘Noisy’ Information and I won’t just listen to any old Tom, Dick or Fred and there are only a limited group of Investors who I do take notice of on particular Stocks and I perk my Ears up when they give an opinion. Screening out less useful opinions is of course difficult and it is only over time with experience that you can find out who is worth listening to and who just adds to your Noise levels - yet again a situation where there are few alternatives (if any) to actually going through the motions and doing your ‘time’ in the Markets.
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