“Why should I manage my own equity portfolio?“ The short answer is that nobody else has a greater interest in making good long-term use of your savings
If you manage your own investments, the interests of you, the investor, and you, the manager, are perfectly aligned. You can make portfolio changes when your objectives change; for example, from building up a fund for educating your children, to starting to draw on investments for that purpose, to building up an income-producing fund for retirement
But most personal investors have a second reason. It‘s your money, and your brains and motivation. You don‘t need to be a control freak to prefer being in charge of your own money. And many of us actually find investing interesting and even quite fun.
This article, and Robur in general, assume that you are a long-term value investor, not a day-trader trying to beat the quants at their own game
What level of return should you be hoping for?
Tax is inevitably a consideration: quoted ‘performance‘ and ‘return‘ figures typically assume that the investor pays no tax, and reinvests gross dividends. This is not realistic, which makes the numbers useless for comparison. So here is an attempt at realism.
Value investing offers no ‘get rick quick‘ magic formulas. Instead, it is a process of incremental steps, combining dividends, modest capital gains when averaged over time, and investment of ‘spare‘ disposable income. Over a decadal time scale, under a typical developed-world tax regime, after tax returns of 4% from capital growth and 3% from dividend income would be a very good result (a total of 7%); but you cannot achieve that in a high tax regime, where you would do well to achieve a total 5% after tax return averaged over 15 years.
These figures are not only close to numbers suggested as achievable by Benjamin Graham many years ago, but are born out by the US S&P 500 records. An investor who bought that index (which, until the arrival of tracker funds, was not possible, but the model is still helpful), reinvested dividends, started with USD 10,000 and added USD 500 per month would have seen this 7.41% average annual return, smoothed over time.
But such graphs need some big qualifiers. People‘s needs change: they might need to draw from their fund disproportionately for one decade, to educate children, and contribute disproportionately before and after that period. Most people pay tax, and taxes are ignored in a graph such as this. Commissions and custody fees are modest today, but they are still paid even with online brokerages. In the graph below:
- Reinvested dividends and capital gains together average 6% per annum after tax
- The investor starts with USD 20,000
- For five years, the investor adds USD 5,000 per year
- For the next four years, the investor adds USD 10,000 per year
- For the next ten years, the investor has no spare cash at all
- For the next three years, the investor adds USD 10,000 per year
- For the final three years, the investor adds USD 15,000 per year
The investor here is assumed to be active as well as intelligent. Just because there is no spare cash to put into the portfolio in the middle years, does not mean the portfolio can lie unattended. Stocks may need to be sold to take profits, and new stocks selected to buy, based on the investor‘s ongoing research. Neither the USD 20,000 starting amount, nor the incremental amounts (averaging less than USD 500 per month over the whole period) are very large, yet the final portfolio is well worth having.
How many stocks should you own?
Well obviously it depends on how much you have to invest. The private investor managing a USD 20M portfolio is likely to hold many more stocks than someone with USD 1M, let alone 10K. Still, here are some thoughts.
In the days before good online brokerages, commission charges were very significant. They still are, if you use your bank to buy and sell stocks; probably at least USD 30 for each trade (which means that on a USD 6,000 holding, you would pay 1% commission on the buy-sell cycle, which is a big chunk). Robur subscribers will typically use a good online brokerage, and the modest commission charges mean that you can own far more stocks, without incurring silly commission charges.
This changes the game. The lowest number of stocks is the number which gives you adequate diversity. That number is probably around 15. The highest number is simply the number of stocks that you can afford to monitor and manage.
The second thing that changes the conventional wisdom is the arrival of the online research tools which cut out the sheer drudgery of analysis and research. Of course, that is why Robur is here: the founders wanted to manage more stocks for their own portfolios, and built the tools to do so. Managing a portfolio of 250 stocks is perfectly feasible nowadays, with the right analytical and presentational tools. That would be the size of a portfolio such as that shown in Graph 2, if each monthly investment was made into a different stock, and in addition some profits were invested in new stocks, while retaining the original holdings. (For example, a USD 500 investment into Company A has doubled in value: sell half the shares, and use the proceeds to buy a new stock).
In practice, if you start by buying a new stock with each monthly investment, and then slowly increase the holdings of the stocks you most believe in, and have the courage to sell the duds, you would have a growing portfolio which would eventually stabilise at around 100 stocks.
How do I choose companies, or sectors of interest, or regions of the world?
Choosing the sectors, and regions, that you are interested in examining, will be driven by your knowledge and interests, as well as by what you read in the financial press. Collecting, checking and collating company financial raw data is of course time-consuming and tedious – but you can leave all that piece to Robur.
A great starting place is what you know. If you‘ve worked in a particular industry for a few years, you probably know a great deal about that industry: the good and bad companies, the CEOs and sales directors, and new product developments. As you read the financial press, other sectors will come to your attention. If nobody likes steel companies, is it worth having a look to see if there is exceptional value in one or two of the companies? If everyone likes consumer goods manufacturers, are there any companies in that sector in your portfolio which look expensive (and are therefore candidates for selling?)
Robur helps you here, because with just 35 sectors, you can choose a sector and immediately get the data for the leading companies in that sector. Maybe the Korean companies rank better than the Europeans on your preferred financial criteria? And so on.
The main point is that deciding what stocks to buy and sell is just an extension of ordinary business thinking. You examine each potential investment as if you were tasked with assessing it as a take-over target, or a divestment target, from the point of view of your investment objectives. Financial experts tend to obfuscate investing with esoteric jargon and weird ratios. It is much better to treat investing as simple business decisions. Stock investing is not a mystery.