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']