If only I'd put it in the bank...?

[onthemove]

In the buzz of the dotcom eurphoria around the year 2000, I took my first very tentative steps into stock market investment. I remember my hesitation. I'd read TMF, I was in IT and salaries were going up weekly, it felt like I'd struck gold with my profession, and for sure I needed to do something 'sensible' with the money.

But what if I lost it all?

You hear all the stories about how people have lost their fortunes in the stock market. What if I turn out to be one of them?

Well, my first investments were a disaster. One 100% loss - thankfully a trivially small amount, so small that with hindsight it was silly - I knew that share was a gamble. The other, a few months later, after buying a proper book on stock market investment I sold out at quite a % loss, but more comfortable in the knowledge I now had a little idea what I was doing - and why I was now selling... at a loss. I'd made a mistake, but at least I now realised it.

So now I was out of the stock market but over the threshold... so do I withdraw from this insane casino, or take a deep breath, have some faith and try to do it properly?

I decided to try and do it properly. Not an easy decision when interest rates around the time were 6% on a low/zero risk bank account.

Fast Forwards...

... after a few iterations of back filling my records (when you're starting out and can remember last detail, who needs to keep their own notes?!), my records of my investment history are for the most part complete - including cash in and out of my stock market accounts. I only have a few gaps in some initial dividend records back data isn't available, but the amounts from that time are negligible compared to where my portfolios are now.

So just recently I got round to finally attempting the calculations that really matter - to me at least.

I've already known for a long while the actual (£) sums that I've made. How much I've made (£) from dividends, how much (£) from capital gains, and therefore adding them together how much I've made (£) total return. But only in total for the whole period of investment.

And over that time, my portfolio has gone from little amounts, gradually growing over the years, to relatively big amounts - a lot from additional subscriptions as well. So even performing any crude guesstimate of approximate APR equivlance wasn't really going to be meaningful.

But finally, I believe that I now have the answers to the big questions I've always had on my own investing...

1. To achieve the £ amount of dividends that I have made, what AER (compound interest) would I have required if, instead of putting my money into a stock market account, I had put it in the bank?

2. To achieve the £ amount of capital gains that I have made, what AER (compound interest) would I have required if, instead of putting my money into a stock market account, I had put it in the bank?

3. To achieve the £ amount of Total Return (dividends + capital) that I have made, what AER (compound interest) would I have required if, instead of putting my money into a stock market account, I had put it in the bank?

And ...? The Results...

Drumroll please....... Overall, across all my accounts...


OK, Sanity Check... Why isn't Total Return (7.7%) = Capital Gains (4%) + Dividend Return (5%)

Good question, and I post my rationale here so others can check if it makes sense ... (or have I got my sums wrong?)

Basically the dividend return is calculated assuming no capital gains. So when it comes to compounding in year 2, 3, 4, etc, there is only the addition of dividends from which the next years AER can compound.

The capital return is calculated on the basis of no dividend return. So when it comes to compounding, in year 2, 3, 4, etc, there is only the addition of capital gain, from which the capital next years AER can compound.

But with the total returns, in year 2, 3, 4, etc, there is the addition of both capital _and_ dividends which can be compounded. So in year 2, the capital gain is also on both year 1's dividend return _and_ capital gain.

This I believe - (?) - is why the total return AER is only 7.7% rather than 4 + 5 = 9%
In effect that 7.7 instead of 9 is showing the power of compound interest :^) (I think)

Caveat / Disclaimer

The numbers (apart from the above) pass the initial sniff test / basic sanity check. They are in the kind of ballpark that looks like they are believable based on the (£) amounts I believe I have made, and the duration of investment - the (£) numbers for the returns, I have a very high degree of confidence in and have had them a while.

Though admittedly, I wouldn't make any decision based on the (%) numbers yet - like giving up work to live off dividends, etc - without another proper analysis and testing that I've got the calculations right .... so please treat these (%) numbers as provisional ... I reserve the right to completely adjust my claims in future .

On an Account by Account Basis



My Initial Reaction...

I am happy with all the numbers except ISA 1's capital return.

For 17 years of investing, that's quite a low number. Surprisingly low - the actual current (£) capital gain amount is OK compared to the other accounts at this moment in time, but clearly when treated as a compound return over the duration I've held the investments, it is quite poor.

The RBS Effect

My initial reaction has always been to blame my < ahem > foray in to RBS for this account's poor performance. With hindsight, against all my best intentions, I let my emotions (greed) get the better of me, and look back now in embarrassment at how I kept going back and buying more, and more and more, thinking I was being clever and just had to wait for the recovery.

But also with hindsight, when I look at the (painful) total capital loss from that share ... if I add it to the current total capital gain for that account, and then consider it across the duration of the account ... it is unlikely to make anything more than perhaps 0.5% difference to that poor 1.1% return.

It seems that even if I had avoided the RBS trap, my capital return performance on ISA 1 would still have been fairly lacklustre, and it's not all that obvious why that might be (compared to the others). The returns in the first several years, actually seemed pretty good.

So...

Long Term Buy and Hold called into Question?

So it is slightly worrying. If my foray into RBS isn't likely to account for that accounts poor performance, what else is? When I look at the (£) movements of individual investments, there aren't any others than stand out as particularly big losses.

It seems to be more of a case that there simply haven't been that many big winners in that account.

But that leads on to another possibility...

The Tax Management Effect(s)

There are perhaps 2 tax related effects that might contribute to the performance discrepancy between ISA1 and Dealing Account 1.

Bed and ISAing for Capital Gains : When selecting shares to transfer into ISAs, I have a tendency to look at those which are sitting on high capital gains, in order to use up my capital gains allowance for that year. This can have the effect of shares being introduced into the ISA that perhaps were already a little 'toppy' and ripe for a pull back.

Risk Taking : I have had a tendency to buy 'safer' shares in my ISAs, and put 'riskier' shares outside. The basis being that losses from the risky shares could at least offset some capital gains, which they wouldn't be able to do in an ISA. The flip side of riskier shares (v. high yields, profit warnings, etc) is that if they recover, their share price can actually recover quite substantially. This might account for the relative terms better capital performance of the dealing account.

Perhaps both are these affects are suggesting that I'm a little too on the conservative side. That in actual fact the shares that I have felt the riskier, have actually returned better, than those that I felt safer buying / keeping hold to transfer into my ISA.

Timing?

Another thing to acknowledge with ISA 1 is that all of its subscriptions were made pre the financial crisis. So it was being built up largely in the bull markets prior to the crash.

The other accounts however, were having their subscriptions made largely during the financial crisis.

This may also help account for the relative variance in their performances.

I know that most of the recent substantial gains did come from having the nerve to jump in quite substantially when everything was coming apart during the financial crisis - when large cap, big name companies, had yields of 6%+. This is probably the first tax year since then, when I am unlikely to have enough capital gains left to use up much at all of this years CGT allowance.

The Presence of Luck

ISA 2's v. good (in my view) performance can largely be explained by luck. When I opened it, I viewed my portfolios as a whole. This meant that my first years subscription to that account basically went on one share. Highly non-diversified in itself - but across my accounts it was well balanced. And similarly for the next couple of years. That account initially held just a small number of holdings, which happened to do very well - one share in particular did very, very well. It wasn't a balance portfolio that I would have dared risk if it were not part of a bigger, multi-account portfolio of which that was just one part. It could just as easily been the worst performing account had those few shares gone the other way.

Dividends for Income / Capital Gains for Inflation

The whole time I've been investing, my ultimate goal is to be able to live off the dividends. But that raises the inflation question.

I have always assumed that in theory, capital gains and natural dividend increases, should at least grow with inflation; there shouldn't be any need to return any of the (£) dividend back into the investment in order to inflation proof income. This is in contrast to most fixed income investments whereby if you don't do anything about inflation yourself, your income will always be being eroded.

And apart from the worrying caveat of ISA 1's capital returns, all the other numbers - including the overall numbers - suggest that my investments have been able to provide a 5% dividend return which could be used for income, while the capital returns do indeed seem to have managed to stay a little ahead of inflation (even the 1.1% would have been higher than inflation for a few years)

Which is nice. Because at the rate of return, I could actually already be in a position where my current expenditure would be covered by a 5% return on current capital value.

Long Term Buy and Hold called into Question? (Part 2)

I don't actually have current numbers for overall yield on each account (that's on my to do list)

But when I look at the individual yields on my holdings, I do notice that the yields in ISA 1 look on the face of it to now be quite low - or at least I seem to have more holdings in there now with low - or no - yields, compared to the other younger accounts.

I am becoming conscious that perhaps if I just sit on my hands, going forwards, I might not actually be positioned to maintain a 5% return from yields.

I think part of that return has come from taking risker higher yielders ... some pay off and others don't.

Overall that seems to provide a reasonable return, but only if when one goes up in price (and yield therefore goes down), I perhaps do need to be better at top slicing, as well as selling cutters and re-investing in new shares which are currently high yield.

In fact, I wonder if it is this tardiness with regards dealing with cutters that has perhaps dampened my returns on this account. Certainly in the early days, when it was my only real account, and therefore centre of my attention, it was performing very well. Since I switched to subscribing to another ISA and dealing account, I have generally not touched it other than to reinvest dividends once accumulated enough.

Caveat II

I fully acknowledge that I have performed these calculations at a time when the stock market is making new highs.

Conclusion

As it stands today, with the markets at all time highs, and with 20:20 perfect hindsight, I can safely say I', glad I didn't leave it stuck in the bank.

But as always with the stock market that could change quite literally in the space of just a few days.
(famous last words!)

And a final passing thought... if it weren't for the dot com boom and the stock market frenzy around that time... I'm not actually sure I would have even considered stock market investments.

[PS sorry for the long post - just using it as an opportunity for myself, to clarify my own thoughts on where my portfolio and investment style currently is, and also thought it might provide some value, based on experience, on the questions around buying with high yields, and also how to handle inflation in a HYP. My investment strategy centres around yield, but is more a hybrid between HYP and value investing. Though I personally do view it as a HYP. It doesn't follow strict HYP approach which is why I've put this post here rather than 'HYP practical']

[onthemove]

The RBS Effect ...

Apologies ... slight correction.

When I wrote that section I had mistakenly compared the RBS (£) loss to the (£) total return for that account, and not the (£) capital gain.

As an experiment, I have just hypothetically adjusted my RBS sale to pretend that the sale price meant I'd broke even overall on my RBS foray.

Had that been the case, the overall capital return would have been 2.9% AER on that account, instead of the actual 1.1% AER.

Still below the others - so there's still an under performance to account for other than the RBS effect (so the other sections of analysis I believe are still valid).

But my initial analysis of the RBS effect was wrong - it did actually have quite an impact on the overall capital return - More in line with what I thought it had had, before I calculated these numbers.

[Itsallaguess]

My investment strategy centres around yield, but is more a hybrid between HYP and value investing.

There's a lot of detail in your opening post, but very little around the shares held over the period.

Given your penchant for 'value investing', I get the feeling that the holdings you've had over the period will be just as interesting to readers as the results in your first post, especially those with a value/high-yield aspect to them.

Are you able to give some details on those at all?

Cheers,

Itsallaguess

[onthemove]

There's a lot of detail in your opening post, but very little around the shares held over the period. Given your penchant for 'value investing', I get the feeling that the holdings you've had over the period will be just as interesting to readers as the results in your first post, especially those with a value/high-yield aspect to them. Are you able to give some details on those at all?

The main reason for my post was looking at the equivalence of what I'd have needed to be where I am had I put my money into a bank account with a fixed interest rate, and particularly with that equivalence split between capital and dividend returns.

The primary reason I had set out to calculate these numbers was to check in reality whether my high yield strategy would potentially need active management to combat inflation, or whether the capital appreciation aspect could handle that and let me simply treat all the dividends as income.

And also therefore, to see what dividend return I had actually been achieving in reality, and therefore could use as an indicator for future 'living off dividends' considerations.

I'm actually a little relieved (and surprised) that even though the capital gains differed substantially across my accounts, the dividend return as an AER was actually fairly consistent across the 3 accounts.

Admittedly these past couple of decades have seen historically low inflation, so the numbers do need to be considered with a degree of caution. But on the face of it, they do seem to suggest the strategy does have a degree of inflation proofing to it .. in fact, it looks like it could beat inflation (while allowing one to live off the dividends)

The other aspect that I thought might interest people, is that a high yield strategy does not necessarily mean low total returns. Admittedly with only 1.1% capital returns AER on one account, some caution is needed. But I believe that may be a manifestation of 'long term hold'. Or it could be poor timing - I stopped subscribing to that ISA pretty much at the start of the financial crisis, at which point shares tanked. Most of my purchases in the financial crisis were in the other accounts, and where the capital gains matched or outstripped the dividend returns. But that said, across all my accounts in aggregate, the capital return on its own wasn't all that bad, and I wouldn't complain about the total return. I'm sure it's possible to do better, and I'm sure many do - I'm happy if (and I expect that it is) fairly middle of the road investor performance - but this suits my level of risk.

As to individual shares, beyond publishing my entire buy / sell history, I'm not sure how much detail of the individual shares would be useful. My 'penchant' for value investing is more of a description I used to try and avoid religious argument over what is and what isn't HYP I personally consider my portfolio to be an HYP, but I know it doesn't fit the strict definition rules

There is a large correlation between the shares I hold and the shares that frequently appear on the HYP Practical board. Though obviously over 17years, I've held quite a number of different shares.

I've just totted up... I've held around 78 different shares in total, although a small number (6 or 7) of those are technically A, B, C shares etc from capital distributions and rights issues.

I currently hold 34 shares, though in the earlier days I was less diversified. The greater overall value of my portfolio, the less I'm prepared to risk going out on a limb on particular shares (a strategy pushed home as a result of my RBS foray).

If you're interested, last year my dividends came from (this is actual dividends as a percentage of total dividends I received for the year, which may be influenced by purchases / sales mid year, etc, so it gives a good feel for my portfolio without actually giving away the specifics of my holdings)



I think at the time of purchase all shares were above 5% yield. In the early days I looked for ideally 7%. For the past few years these did seem in short supply, and in the interests of diversification I have bought shares in the 5% yield range, but still prefer 6%+. Though I note that some of the shares I currently hold are back into the 7% yield range (like SSE) and if I didn't already hold these, I would probably be buying.

In terms of performance, I'm not going to provide all the details, but these are my top movers (good and bad) in absolute (£) terms, sorted in descending order of impact...

I don't want to give away the actual values so in order to relativise them I'm going to list their (£) total return as a percentage of my overall (£) total returns...



It should be noted however, that who sits where in this list does change fairly substantially even over the space of a few months just from market movements, so I don't feel I'm giving too much away by it. But it does provide an insight into the shares I have (or have held), and which have been giving the better returns.

For example over the past year utilities have become substantially less prominent due to popularity of labour at the minute. If John McDonnell gets in as chancellor, utilities are toast and their yields are now reflecting that. But even then, having bought most of my utilities at similarly high yields originally quite a while ago, they are still reasonably up my total return table. The one exception is Centrica, which I bought recently and sits just off the bottom of that table in the loss column it was supposed to be a steady dividend paying utility.

It should also be noted that the list is skewed by date ... by that I mean, because I have been saving substantially each year over 17 years to build it up, what were large movers (%) in the early years, are now further down the list just because I'm dealing with larger sums with current investments. And not necessarily because the current investments are actually any comparatively better in (%) terms.

Additionally, while this list might look like it is mostly in the right hand column, even just 12 months ago that wasn't the case. The fall of the pound thanks to brexit helped give international shares a boost, and then the general global recovery in stock markets has also helped give more a lift. This has pushed some companies further up the gains side, and shifted others down the losses side (has reduced their loss).

Some comments on my top movers...

S&U
I think (iirc) this came to my attention from someone mentioning it on TMF's HYP board, where the concensus soon seemed to deem it non-HYP due to too small cap (iirc). It initially went down after I bought, but then started rebounding, and just kept going. It thankfully seems to have been positioned in the sweet spot midway between wonga at one end, and the big evil banks at the other. It just quietly got on with prudent lending, without 'casino' banking, without bailouts, and without ripping people off like the payday loans companies..

I seem to have sold out at about the right time. It was a while ago, and it's now only slightly higher, and its dividend hasn't caught up yet.

Considering smaller cap shares is one of the aspects in which I differ from the HYP. But this one made it to the top of my performance chart.

Stobart
I'll be completely honest, I don't know what's going on here . I originally bought at around 6-something-% yield. Danger zone according to the HYP practical bods. But then out of the blue they doubled the dividend. . Then out of the blue, they increased it AGAIN by 50% . . And now, afte an enormous corresponding capital gain, it STILL sits on an almost 7% yield! And the directors have said

""The group has non-operating asset resources available to support the dividend until 2022, and thereafter dividends are expected to be funded out of operating profits.""

How they've managed this I don't know. How did the market not see this value originally? I know we usually complain about not seeing bad news, but this seems to be a case of the opposite. They kept the good news well hidden!

As a result of the capital appreciation, these are now my biggest holding, and I feel fairly exposed but I'm blowed if I'm going to sell a 7% yielder that got there by increasing their dividend significantly, not just once, but twice.

And similarly to S&U, I don't think most purist HYPers would consider this an HYP share due to it's small cap - which is why I said I look at a hybrid HYP / Value strategy. These probably account for much of the good performance of my ISA 2.

RBS

'nuff said.

The Rest

With the exception of perhaps Air Partner, Thorntons and Christian Salvessen, all the rest pop up regularly on the HYP board, and I don't think there's really much more that I could add that hasn't already been said many times by many other posters related to those.

And of the 3 exceptions there, only Air Partner is still listed (the other two were taken over). And Air Partner at the minute feels as though it may have moved out of value territory. The chart shows it is now above long term typical values - ah! but so is Stobart! yes, but Stobart increased its dividend, so Stobart's rise has some foundation - Air Partner hasn't, so its yield is now below what I would jump in at. Though I'm still holding for diversification ...

Oh dear... that usually means it'll dip back down. Possibly. Maybe probably. But, while I may have doubts about v. long term hold, equally trying to trade the market isn't for me. If it goes up further and the yield drops further I might sell. But I have quite a hysteresis between buy points and sell points, in order to minimise trading costs. Investment gains come from holding shares.

And one final comment on that performance...

Like I've said, it shows how much it moved for me. This could be a big move for a small investment, or a small move for a big investment. You can't tell from that table (I don't want to give away every last detail of my investment finances :^)).

But I will mention ... both S&U and Stobart were normal level investments for me. Neither had disproportionate initial investment. Their position up that chart is not indicative of any attempt to go large on those. In fact, both investments were slightly below my typical commitment e.g. for (usually large established) companies in which I have more confidence they will likely survive. Their position up the chart simply is a case of some you win, some you lose - those happened to be in the former category. If I'd known that when I bought ... if only.

But I mention these specifically - particularly in light of some of the discussion about Carillion (which I luckily happened to avoid completely) - to show that, yes you may get the occasional loss, and you tend to notice that. But don't under-rate your better performers either.

I might not have held Carillion, but I did make a big mistake (loss) on RBS and the losses hurt, but currently I have 2 shares that each individually on their own have offset that mistake, shares that didn't require gambling big amounts ... they got there by being completely unexpected multibaggers.

I know for some div(w)ersification is a swear word, but really ... the unexpected can sometimes work both ways.

[Itsallaguess]

As to individual shares, beyond publishing my entire buy / sell history, I'm not sure how much detail of the individual shares would be useful.

Thanks very much for such a comprehensive reply, I really didn't expect you do go into so much detail, so that's very much appreciated, and also very interesting to gain a rounded view into your approach.

In broad terms, it looks like you're primarily looking for higher initial yields than I'd be too comfortable with on a regular basis.

That's not to say that I've not bought at similar yield levels, but where I have in recent years, then I've tried to only do so with specific companies when they've popped into those sorts of yield zones, rather than starting with the yield zones and then looking for companies that pop into them...

I personally think this has been a key lesson for me over the years I've been running my HYP, and it has helped me to reduce the number of high-level catastrophes that seemed to occur with my portfolio in my early years of ownership.

That's not at all to say that I've since been immune from them, and I'll hold my hands up and say that I lost some capital with a recent Carillion holding (although nothing like it would have been had I held on for a longer period), but I do think a change in my approach has helped reduce the number of similar occurrences, and where it has still happened in recent years, the overall portfolio effect has been relatively low.

If you're willing to do so, I'd also be very interested to hear about your sales in recent years, and why you choose to do so for those particular shares, and perhaps what sort of sale-price you achieved at the time compared to your initial stake. Have you been known to sell under-performing shares and rotate that capital into high-yield alternatives, for instance?

I must say at this point that I would be scared witless by the Stobart director comments regarding 'non-operating asset resources being available to support the dividend until 2022'.

If I owned a company where that was a current, de-facto director policy, then I would in no way see the fact that they'd raised the dividend during this period, or that there had been some share-price appreciation in recent times, as any indication at all to be a reflection of the sustainability of that situation....

Thanks again for such a comprehensive reply.

Cheers,

Itsallaguess

[Gengulphus]

Basically the dividend return is calculated assuming no capital gains. So when it comes to compounding in year 2, 3, 4, etc, there is only the addition of dividends from which the next years AER can compound.

The capital return is calculated on the basis of no dividend return. So when it comes to compounding, in year 2, 3, 4, etc, there is only the addition of capital gain, from which the capital next years AER can compound.

How exactly did you do those two calculations?

I ask because you presumably did something with the dividends produced by the actual portfolio. That something might have been withdrawing them from the portfolio as cash, in which case you can ignore the dividend figures for the actual portfolio and use its other figures unchanged for an "on the basis of no dividend return" calculation.

But if you reinvested them within the portfolio, then subsequent capital gains are higher than they would have been if there had been no dividend return - so if you ignore the dividend figures for the actual portfolio and use its other figures unchanged, you end up with a capital return figure that is higher than it would have been if there had actually been no dividend return. So to do a proper "on the basis of no dividend return" calculation of the capital return, you've got to either adjust the capital gains it uses downwards or pay attention to the actual portfolio's dividend figures in some way. That can potentially be done in various ways, but the most straightforward is to do the capital return calculation on the actual portfolio's figures, but pretending that the dividends were paid into the portfolio from outside it, rather than generated by investments within the portfolio - or in terms of the notional bank account whose AER you are calculating and trying to match to the actual portfolio performance (*), that the dividends were extra deposits into it rather than interest it generates.

There are similar issues in reverse about a dividend return calculated "assuming no capital gains", but somewhat more complex ones. Capital gains would be no problem if they were withdrawn as cash from the portfolio as they were generated, but who on earth does that - especially for unrealised capital gains? Realised capital gains could be dealt with by treating them as extra deposits into the portfolio as they are realised, with only the usual "which shares did I sell?" issues on partial sales of holdings generated by multiple purchases at different prices - one needs some sort of rule to resolve those issues, but sensible ones do exist and it's basically a matter of choosing one of them (which you choose will change the answers you get to some extent). Unrealised capital gains could be dealt with by 'marking to book' periodically - i.e. effectively treating them as being realised once per year/quarter/whatever - again, the choice made will affect the answers you get to some extent. Without using some such treatment, the dividend return you get will include dividends generated as a result of capital gains producing extra investments or higher-value investments which generate dividends, and so won't be "assuming no capital gains" properly, with the result that you get a too-high dividend return.

Personally, when I've done such things, I've used the actual portfolio's figures to calculate the rate of total return, the actual portfolio's figures with dividends treated as extra deposits into the portfolio instead of returns generated by it to calculate the rate of capital return, and then calculated a rate of dividend return as the difference between them. It would be more precisely described as a rate of extra return due to dividends, but that's very long-winded and I feel that "rate of dividend return" is adequate!

(*) Incidentally, in case you're not aware of it, the "Internal Rate of Return" or "IRR" is precisely that AER, and IRR() and XIRR() are two spreadsheet functions that can be used to calculate it. The IRR() function is usually inadequate for portfolio performance calculations, as it assumes regular intervals between payments, so the XIRR() function (which is eXtended to take the dates of the payments as inputs) is normally used - and people often refer to the answer as the portfolio's "XIRR"...

Gengulphus