Saturday 21 March 2015

Individual Shares - Review & New Strategy

I have been investing in equities for many years using mainly a combination of individual shares and investment trusts. Historically, one of the main reasons for this twin approach was to try to minimise costs. Unit trusts were more popular with small investors in the 1980s and 90s but usually more expensive than investment trusts.

For the past 7 years or so, since retiring, the aim of my investments has been to generate income and I have naturally gravitated towards building a sustainable higher yielding portfolio. In early 2013, I did a couple of guest posts for RIT “Investing for Income… Using Shares” and “…Using Investment Trusts“.

Shortly after this, I started this blog and I thought it could also be a useful exercise to track my income portfolios and have therefore monitored the progress of an individual shares portfolio and a separate investment trust portfolio.


As some readers will know, one of the most difficult aspects for me personally, and maybe for other small investors, is the volatility of the price of individual shares. Much of the time I try to filter out these fluctuations but however much I do this, there’s no escape from the emotional rollercoaster of holding shares.

Of course, this is not so much of a problem when prices are generally rising, as they have been in recent months. The FTSE 100 broke through to its all time high of 7,020 last week.

When I was younger, working full time in my business and various other activities, my shares were probably much less of a focus. Now I am retired and writing my ebooks and blog, the investments are more upfront and dominant - perhaps more significantly, I depend on them for my income.

Another aspect of share price volatility is income yield. If the price goes up 30%, 40% or even 50% in a fairly short time frame, although I will get exactly the same dividend in my account, the yield will have dropped.

Take a couple of examples - I bought L&G around a year back for 205p and a yield of 4.5% - 9.3p per share. Today the sp is up to 295p - an increase of over 40%. After 12 months the dividend has been increased over 20% to 11.25p but the yield has fallen to 3.8%.

Likewise with easyJet, the share price has had a strong run over the past few months - up from around £12.50 to currently £18.50 in just 6 months - a rise of nearly 50%. Although the dividend was increased by 35% this year, the yield has fallen to less than 2.5%.

My instinct is in both cases to hold long term, but I am also aware not to become emotionally attached to any one individual holding - the dramatic rise in capital values offers opportunities to obtain a better income elsewhere.

Dividend Cuts

Share price volatility combined with a drop in income is a double whammy for this income investor who relies on investment income to pay the bills and put food on the table.

Over the past year, 3 of my holdings have announced the dreaded ‘C’ word. My two supermarket holdings Tesco and Sainsbury performed poorly in 2014. Tesco cut its interim dividend by 75% and later cancelled its full year dividend. Sainsbury announced that they would fix dividend cover at 2x earnings - forecast earnings for the coming year are 26p for this year and 22p for next year which implies a dividend of 13p and 11p compared to last years dividend of 17p.

More bad news on income recently when British Gas owner Centrica announced a 30% cut in dividend.

Although my shares portfolio is only around 40% of my equities holding - cuts to 3 of my shares out of 24 will have an impact on overall income for the next year or two which I will need to try and make up elsewhere.

A Quieter Life

By contrast, the volatility on my collective investment holdings is less of a rollercoaster and therefore, from an emotional aspect, I find them much easier to maintain some equilibrium. This is only to be expected given the number of holdings in each trust or fund.

In addition, whilst the income from my shares and trusts are very similar, the total return from my basket of investment trusts has outperformed my shares portfolio in each of the past 5 years. The percentages are fairly modest - last year for example the gap was only 0.2%, the previous year a little higher at 3.1%, 2012 was 2.5%.

These performance figures have been nagging away for the past year or so and have prompted me to seriously question whether the more profitable route over the longer term would be to switch the proceeds of the shares entirely to collectives.

As we have seen with management charges, the effect of an extra 2% or 3% compounded over several years can make quite a difference to your final outcome.

The total return on my equities portfolio for the past 5 yrs has been : 2010 10.4% (13.5%), 2011 1.1% (2.9%), 2012 11.5% (15.5%), 2013 13.9% (21.0%) and 2014 3.5% (1.8%)  [total returns for the Vanguard UK Equity Income fund shown in brackets/bold]. Combined 5 yr total for above returns are 40.4% (54.7%).

When I take a cold, hard look at the analysis and compare performance - firstly shares -v- investment trusts, and secondly my combined income equity -v- Vanguard fund, it is clear that something needs to change and hence a review of the past 5 years leads to the conclusion that a new approach is needed.

New Strategy

I have asked myself a couple of questions -

Does my shares portfolio give me an edge over the other possible strategy options, and

Is all the time and effort I put into researching and running such a portfolio worth it?

If I am honest, the answer to both has to be NO.

Having regard to all of the above, I think it is fairly clear that my individual shares have been the weakest link of my income strategy to-date. A 5 yr time frame comparing parallel portfolios is long enough to draw conclusions and I feel therefore the time has probably come to wind down the shares portfolio and redirect investment towards my investment trusts, ETFs and also to embrace the possibility of more low cost tracker funds such as my recent purchase of Vanguard UK Equity Income.

That’s not to say I will be selling all my shares - for the time being, I will maintain a slimmed down portfolio of what I regard as solid long term core holdings - the likes of Unilever, Next, Reckitt etc. I have however started to sell off some of my shares which have seen significant share price appreciation and which have as a result, become lower yielding holdings.

This process has started with portfolio sales of DS Smith @ 377p, Hargreaves Lansdowne @ 1175p and Sage Group @ 489p. The proceeds of these was £5,560 and from last month, Imperial Tobacco £1,897 have been reinvested into the Vanguard UK income fund.

I will update the individual shares portfolio in the next week or so.

As ever, slow & steady steps…..
Spring is here!


  1. really appreciate you laying it all out like this. It is saddening that sainsbury's will probaly cut their dividend too, unless something miraculous happens, but I am not selling my sainsbury's shares either. I did sell my tesco shares about 2 years ago - I thought they were probably crap and I sort of smelt a rat... so I just got out there and then.

    I think it's a good plan to reduce your holdings, if they are indeed the weakest link in the whole portfolio. why do more of what is weaker? well, you wouldn't would you.


    1. TV,

      Thanks for your comment.

      I agree with hanging on to SBRY to see how things develop - I believe the shares were heavily shorted last year but things appear to have stabilised for the time being so we will see - I think the move with Netto will prove to be good.

      You did well to get out of Tesco at a good time - this would have been when Warren Buffett was buying more, only to then sell at the bottom and lose $400m!! The shares are up over 30% so far this year - again, hanging on and hoping for some better news.

    2. I do hope that SBRY will come back up, mostly because I believe in them as a company. I worked for them briefly several years ago, and was most impressed with every member of staff I met. Really great bunch of people, and everything was generally pretty well run in my opinion. Of course, that doesn't mean much to share prices and dividends if the marketing team are not out there showing you that it can be as cheap, or cheaper than Aldi if you shop with a bit of savvy.

      Just as a slight aside...I do wonder whether it might be fun to invest in Tesco, now that they have potentially bottomed out. It's not my own personal strategy, but say if I were an employee with access to the sharesave scheme, I would probably seriously consider it.

    3. I believe theres value (excuse pun!) in Tesco at current price of around 240p even after strong surge - 30% this year. I topped up my holding after the falls last Autumn so happy to see them back on the upward escalator. Unfortunately, I really need income so this side of the equation is not working for me at present. I think the new CEO is doing a creditable job in trying to restore confidence. As ever, time will tell...

    4. HAHA, but seriously, yes agreed on the above. I'm looking for income too, but I think the waters will settle so to speak for 12-18 months first, and then we will see where we are at with the broader grocery retailer situation.

  2. Nicely written article, I came to the same conclusion some time ago and there are huge amounts of research that show "active" investing doesn't work.
    Investment trusts are better but still very active and I have concluded that cheap ETFs are the way to go. However I have still followed my value philosophy by choosing ETFs that I believe offer better value. Although I am an expat Brit I need to invest in USA securities so my choices are NORW (Norway index), EWS (Singapore index), SCHC (World small companies ex USA) and DBEF (World large companies ex USA). NORW and EWS give cheap fundamentals and SCHC/DBEF give great global (developed) coverage whilst avoiding an over valued USA. The dividends are not too shabby either. There are sure to be UK equivalents. It is not the purist indexing approach recommended by many such as Warren Buffett (see his last shareholder letter) or the excellent Accumulator on Monevator but it works for me!
    The other benefits will be peace of mind (low volatility due to wide spread of investments) and much more time to enjoy the rest of your retirement. By the way it's not always possible to carry on being an active investor as you get older due to health/mental issues.
    Good luck!

    1. Interesting to see a different approach from the expats point of view - I am sure there will indeed be UK options for most/all of the ETFs you mention.

      I think the main point is that you have developed an investment strategy that works for you and with which you feel at ease.

      Also, an excellent point made at the end - maybe as small investors get older, they need to take account of these aspects and maybe adapt their approach to their investing - maybe a good subject to cover in an article before dementia sets in!

      Thanks for dropping by and taking the time to read/comment - much appreciated.

  3. Hi John, active investing definitely isn't easy and if you're not beating the market then you're probably making the right decision to be more passive (unless of course you find stock picking intrinsically rewarding enough to offset the underperformance!).

    I know what you mean about the volatility/stress too. One thing I've learned is that investors find it almost impossible to view a portfolio of direct share holdings as if it were a transparent collective fund. In other words, your ETFs or investment trusts have just as much volatility as your individual share holdings, but you just can't see it as those collective funds are opaque. I don't really know how to get past that problem, which is one reason why I think the push for more transparency in funds (like Woodford showing all his holdings every month) might be a mistake as the assumption is that the unit holder is better off knowing all the details, which I don't think is true.

    Anyway, you are right to quit being active if it isn't working. There are many more productive things you could do with your time, I'm sure.

    1. John,

      Thanks for your thoughts and a very good observation about thinking about the shares portfolio like a collective rather than the focus on each individual share holding - an aspect I have not considered before.

      Posting on my blog is a little like going to the confessional - once put down on the web I am held to account - which I think is a good thing as its all too easy to delude yourself as a small investor (maybe as a fund manager too?).

      I am not saying the shares have not/ will not work - the returns over the years ahve been very good and, apart from a couple of cutters, the income has been as expected and I suspect the income returns from the alternatives may not see much improvement (fund/platform charges).

      I think the main thing for me is to reduce volatility in a section of my portfolio and try to tweak up total return with a little less effort.

      Thanks again for stopping by.

  4. Interesting. I wonder if your single name portfolio would perform better in a bear market or not. Given the last 5 years have been a bull run then maybe the comparison isn't fair.

    Of course unless you're a hot shot analyst, the logical person in me says that the added diversification of etfs/funds/indices would protect you more in a downturn. You'd certainly be running less risk, even if the resultant outcome is unknown.

    1. Hello UTMT - good to hear from you again and thanks for your comment.

      Whether the shares may perform better in a down market is a good point and one I have thought about. My income focussed portfolio was started around 2008 so mostly bull market - I suspect during the coming down market (whenever that may come along) the shares will be just as volatile.

      Having had a little while to reflect, I feel the move away from individual shares towards more collectives is probably the best option for me at this stage. The strategy which seemed OK in my 40s and 50s may need to be tempered a little in my 60s!

  5. Hi diy investor,

    I think I can relate to your post about how price volatility can affect your emotions. I consider myself a discipline investor and disregard my emotions, going only with the numbers. But even to this day, my stomach churns when I see a stock in my portfolio plummet in price. I think it affects pretty much everyone, seeing your portfolio go down like that, but I feel like I'm in heaven when everything goes up! lol. Cheers.

  6. Mark,

    Good to see the blog is reaching US of A!

    I agree, I think most small investors will have some emotional reaction to the markets - maybe those holding mainly shares more so than those holding collectives and diversified trackers. I think it is important to consider your tolerance to potential market volatility when deciding on appropriate asset allocation.

    Good luck with your shares portfolio and your blog.

  7. Hi diy investor (UK)

    My main concern is the investing in Vanguard LS60. If you you look at history then the Stock market outperforms all other markets and presently the Bond market is very expensive, so I'm not sure I would invest in that sector currently, but I have been calling that market expensive for 2 years, so what do I know?!

    I agree with you getting out of the Direct investment in shares if you do not feel comfortable in that market and the logical place for you would seem to be the Equity Income sector whether by Mutual funds or ITs which ever takes your fancy.

    My preference is to hold approximately 50% in shares and 50% in Funds, normally non ITs as I have found those produce better returners and have followed the recommendation to diversify across the geographical sectors e.g. but these have not worked for me from a capital point of view more recently.

    However my philosophy with funds is to let them run their course and then review in the light of experience and what I want the portfolio to do