Low-Risk investment strategy ?

aliciathyme

I have developed a strategy for a stocks and shares ISA investment which has been successful over the last 5 years.

I lodge a lump sum with my broker in a self-select shares ISA and allocate 1/3 to each lot of shares I buy. After three buys the investment is all utilised so I wait for a profit to show and only buy a new holding by selling the most profitable holding. As the profits accumulate I buy additional holdings of the same lot value. Patience is required, and the scheme gives a slow growth over a long period (currently my 5 year investment is showing 332% net profit, and the 3 holdings have now become 15 holdings, an additional 85 holdings have been sold, of which 81% were in profit).

To minimise risk I buy only FTSE 100 companies, which gives the advantage of high liquidity, and I use a 40% stop-loss to cope with disasters. And to minimise risk further, I can take out a new ISA each year to spread the risk across more companies.

The scheme has the advantage that the only costs are associated with normal broker fees and although there is no tax liability within the ISA, I feel I am still doing my duty through the 0.5% stamp duty levied on purchases.

I am interested to know if anyone else has used a similar "sell-to buy" strategy, and what their results have been.

Linton

Are you sure about 332% gain in 5 years? I cant see how you can have done this with FTSE100 companies - 5 years ago the FTSE100 was higher than it is now.

Aegis

This certainly isn't a low risk investment. If you start out by holding 3 direct equities, then it's at least medium risk by most definitions depending on the nature of the companies, most likely it's higher than that.

Definitely not for the feint of heart.

aliciathyme

Linton wrote: »

Are you sure about 332% gain in 5 years? I cant see how you can have done this with FTSE100 companies - 5 years ago the FTSE100 was higher than it is now.

Well, my initial £10,500 is now £45,415 net, including £4,865 in dividends. (I have to admit though that this was not in an ISA, that wrapper was a later idea which I have been using since April 2010, which is currently showing 125% net profit).

You say that the FTSE 100 is now lower than 5 years ago, true, but I have been selective within the listed companies, buying low and selling at profit. It's not too difficult to beat the FTSE index if you look at trends of individual constituents.

Unfortunately I am unable to post attachments or I could present a list of all transactions.

aliciathyme

Aegis wrote: »

This certainly isn't a low risk investment. If you start out by holding 3 direct equities, then it's at least medium risk by most definitions depending on the nature of the companies, most likely it's higher than that.

Definitely not for the feint of heart.

Realistically I agree that anyone investing in the market must accept that there is always a risk, and the past does not guarantee the future, but in my experience, by careful selection the risk can be mitigated. Personally I feel that an 81% success rate would suggest low risk. The 81% profitable sold holdings included 31 showing net profit between 20% and 93% to compensate for 10 further holdings which were sold just below -40% on stoploss. i.e the winners well outweigh the losers.

fiesta04

So are you saying that you have not put any more money in, so only your initial £10,500? If that is the case WHY?

F4

bowlhead99

330% in 5 years is about 34% compound return a year and is possible if you didn't lose your shirt through the negative markets in 2008 and Q1 2009 ; if most of the 10,500 was invested in 2009+ when the markets were rapidly recovering from their lows, it's possible to have achieved this. Lloyds is up 70-80% this year to date for example (best performer in the 100 this year), and if you are actively trading you can make money even on a stock which has been flat.

There is no way this is low risk though, and the fact that some of your 4k dividends were tax free in your ISA does not change the risk profile because dividends from safer funds would also have been tax free.

Most people would back a bunch of losers as well as winners over that timescale though. Even though the FTSE has gone up since early 09, The fact that you have 4/5 winners (81% making a profit and being cashed-out before hitting that 40% loss) is somewhat surprising.

Interesting that you have a strategy where you cut losses at - 40% ; is there a particular point that you cut winners at + X%? You said when a profit is showing you will sell the most profitable holding and buy a new holding. But presumably you will not really sell and reinvest when the 'winnings' from the portfolio simply go up 2% in one day, which will happen on many days in the year -you'll wait for some arbitrary other point when the gain has got larger. With some stocks you might fail to sell at +5, +5%, +15% and it would be easy to keep your cash trapped in that company realising no actual gain until you wait for -40% to be hit and sell out at a loss, thus always losing money and never winning?

Minimising risk is not simply sticking to 100 large companies and adding new holdings from time to time - if you were minimising risk you would not be 100% in UK equities in any period let alone the down markets in 2007/8 which are within your timeframe.

You also mention tax benfits within the ISA, which makes sense from a HMRC reporting perspective when you are turning over 15-20 positions a year, but if you have really exited 80+ investments in 5 years and are doing it on smallish (S&S ISA level) cash contributions, you probably haven't saved as much tax as you think.

I've had a variety of equity exposure in the last 5 years but have definitely not achieved compound 30%+ IRR each year; that said, I would not invest so aggressively as to put all my eggs in indivdual FTSE 100 shares.

Not sure about a "buy to sell" strategy or whatever you want to call it. You've bought 100 investments in a row over 5 years and the vast majority have been winners. It would seem technically possible to do, just like a martingale or reverse martingale system at the roulette wheel is one way of making money in a casino -but if you stand back and look at it from a third party's perspective there are no guarantees and a risk of wipeout.

I have been selective within the listed companies, buying low and selling at profit. It's not too difficult to beat the FTSE index if you look at trends of individual constituents.

I'd contend that 'buying low and selling at a profit' on 4/5ths of your investments while placing average three trades a month for five years in succession is difficult to do. Forgive us for being sceptical when a brand new poster joins an established board and tells everyone there that he's done just that and is curious to know if everyone else has had similar results. And titles the thread 'low risk invesment strategy'.

It sounds like a troll, or someone who is going to sell us his 'how to pick a winner' system.

aliciathyme

bowlhead99 wrote: »

........ Forgive us for being sceptical when a brand new poster joins an established board and tells everyone there that he's done just that and is curious to know if everyone else has had similar results. And titles the thread 'low risk invesment strategy'........

Many thanks for your comprehensive response bowlhead99.
I understand your scepticism, but I assure you I am not selling anything. Indeed, as an amateur I had not intended to patronise professionals by discussing stock picking methods, just to find others who might have adopted the Sell-to-Buy strategy for handling buying recommendations wherever they come from - whether personally selected or from a professional advisor. If you are interested in my stock picking methods I would be perfectly willing to discuss them, but that is another topic.

However, I will respond to some of your points:

Regarding the 2008 & 2009 downturns I sold everything and immediately restarted on the same 3:1 basis, and as you say, the general market recovery was a major opportunity for buying.

On the "low risk" issue, as you will have seen, I have made some losers but I simply contend that 81% success rate is pretty good.
My 334% over 5 years is better than all the commercial funds listed by trustnet.com, whether Investment Trusts (the best is Aberdeen Asian at 220%) or Unit Trusts & OEICs (the best is GLG Global Corporate Bond at 93%). Would you consider those to be less risk?

Regarding when to sell, I selected the cut-loss at a level which retains comfortably half the value of a falling holding and dumps the funds into the kitty. This is very easy to arrange via a broker so you do not have to be on the ball all the time. I do not take profits at any particular level, only when I want to buy something else. The longer an equity is held, the more scope for it to increase in value. You might also argue that the longer you hold the more scope for losing - but that is less likely when you are buying equities you expect to rise. In my experience, those which fall mostly recover later if you are patient.

The point of the Sell-to-Buy concept is that you only sell when you want to buy, and you sell only the best in-profit holding. I actually ensure I at least recover costs by selling at minimum profit of 4 x costs (about 4.8%) - BUT ONLY when I want to buy ( if nothing is in profit when I want to buy I go for a coffee and wait for another opportunity (I got through a lot of coffee in the last 5 years).

Sorry if I had not explained myself very well, I hope this makes things clearer.

Alicia

Glen_Clark

So how do you pick so many winners, and avoid so many losers?

aliciathyme

Glen_Clark wrote: »

So how do you pick so many winners, and avoid so many losers?

Since you ask, the first point to make is that when Jo Public gets to hear any market news it is too late to take action because any effect is already built into the price of an equity. So, we are always too late to the game. However, it is not too late to spot trends. So my main criteria is to ignore blogs and chitchat and to use the DIY approach by looking for rising trends in the price of individual companies. I have collected a dataset for the FTSE 100 constituents over the last 10 years which I add to towards the end of each day, and then run a trend function over the data.

If the trend over the last 2 weeks exceeds 10% and the price today is lower than yesterday then I consider that to be a buying opportunity. This works well in a rising market and allows me to lock into companies with a well established rising status (this accounted for 50 holdings averaging 23%, plus 3 stoplosses). I supplement this with another function which looks for anomalies in the pricing structure - much like exceeding predetermined dynamic boundaries around the immediate historical pricing (like Bollinger bands), but also by comparison with the general market trend as shown by the FTSE 100 index value (this accounted for 25 holdings averaging 13%, plus 7 stoplosses).

I also revisit the companies which have been hit by the 40% stoploss and rebuy them at the point when they have lost 50% (this has occurred 10 times and been a successful strategy in every case, returning on the rebuy between 8% and 47% with an average of 26%, which effectively recovers the 40% loss to only 14% loss).

I think I have covered all the fundamentals.
You are welcome to use the system (no charge!)

Alicia

bowlhead99

aliciathyme wrote: »

My 334% over 5 years is better than all the commercial funds listed by trustnet.com, whether Investment Trusts (the best is Aberdeen Asian at 220%) or Unit Trusts & OEICs (the best is GLG Global Corporate Bond at 93%). Would you consider those to be less risk?

Yes, I would consider them to be less risk.

- The GLG bond fund invests across the world in corporate bonds, which are loans made to companies which get paid back before a single company shareholder gets a penny, in a liquidation situation. If the company raises more cash through issuing shares, the existing shareholders get diluted but the bondholders still get their cash back and they are still entitled to a good rate of interest whether or not the company can afford to pay a dividend.
- A typical top 5 investment of the bond fund is about 2.5% of its portfolio, so it will have 60+ investments and if something goes wrong with one, it is not an issue. Your strategy was to invest in the equity of three companies.
- In terms of diversification by sector and geography, the bond fund invests globally and its fortunes are not tied particularly to the performance of any one economy or market sector. With 10%-40% of your portfolio in a single company, same can't be said. The global outlook does bring an element of exchange rate risk but then your FTSE companies will have revenue streams and assets in foreign currencies too and so this is not a particular problem.
- The bond fund became much more valuable over the credit crunch precisely because everyone recognises that this is lower risk than an equity fund and certainly much lower risk than your portfolio.

This said, bond prices are in a bit of a bubble at the moment and though corporate bonds are less bubbly than government bonds, I am not piling all my money into them today.

- The Aberdeen Asian Smaller Cos similarly has 66 investments and is well diversified.
- Headline performance for 5 years is 220%, though presuming you 'started again' after the big crash, a pound invested in March 2012 is worth ~£4.20
- While investing in smaller companies in emerging markets does not generally sound lower risk than investing in FTSE100, investing in a basket of 66 companies is safer than investing in three. As you demonstrated, UK listed blue chip companies can easily go down by 40%+ ; there are only 100 companies in the FTSE 100 and you invested in ten of them that went down by 40% despite your careful analysis.

The longer an equity is held, the more scope for it to increase in value.

No argument there, if it is the right equity, but this might contradict your next point:

The point of the Sell-to-Buy concept is that you only sell when you want to buy, and you sell only the best in-profit holding.

Selling your best performing share is something your brain tricks you into doing because it likes the buzz from cashing in a winner.

When you need to fund an opportunity, the correct thing to do is to sell whichever share or shares in your portfolio have the least prospect of giving you the return that you expect to get from whatever you are going to buy with the funds. It is an exercise in looking forward and not looking backwards.

I could easily imagine a 3-share portfolio from within my own portfolio where the best performing share is one I want to keep as it has strong prospects, and the current worst performing share pays a good dividend and looks oversold, and the one to sell is in the middle. In another virtual portfolio I would sell the bottom one because the bad news that caused it to fall 20% will impair its returns going forward.

aliciathyme wrote: »

[various bits and pieces about the technical analysis / charting]

In a well developed market like FTSE 100 I suppose there's nothing necessarily wrong with looking at a share on the technicals of its price graph, rather than the fundamentals of how much profit it's making. After all, part of the share price movement is a function of people being attracted to the stock who have already done proper analysis of fundamentals, and part of it is due to buying by massive hedge funds whose actions are to an extent determined by computer simulations driven off simple moving average charts.

The whole technical analysis thing is self-perpetuating if everyone is making the same buy or sell decisions when they see the same movements. So I do accept that making investments on historic price movements is not quite as risky as making a roulette bet based on what number came up historically.

But if you're only holding a few stocks at a time, and some of them are being held long enough for a 93% return, sounds like there's a bit of 'buy and hold' investing where you should really care about the fundamentals of each company rather than breaking through a band on a chart as your trigger to buy or sell. From what you've said, you're selecting companies to transact purely because of their historic price performance and despite your success in a rising market this can not possibly be low risk.

It's nowhere near as low risk for example as simply buying and holding a tracker fund which owns every share in the FTSE 250 index - which went from 5900 in March 2009 to 12900 this month, while producing reasonable dividends (obviously a carefully selected period but you see my point?)