Nearly time to look at my S&S ISA - rebalancing tips for current climate

bowlhead99

Nick_C wrote: »

My reviews are aimed at maximising the effective yield - looking at the dividends I am getting and comparing them with the current value of the shares. If the price has gone up and the dividend hasn't I sell and reinvest. Some people may be horrified by this approach, but it has worked very well for me.

The problem with that approach of being yield focused and selling out when a company no longer fits the box, is:

- the current value of the shares is based on how everyone in the market thinks the company will perform and what dividends it is likely to be able to pay (i.e. *future* value of the assets and dividends) ; whereas

- "the dividends I am getting" can only be based on what they have physically paid you in the last month or quarter or year or whatever, or perhaps what they have declared they will pay for the period just gone but haven't got around to sending you in cash just yet (i.e. this is the *past* value of the dividend stream).

So, unless you are carrying out your own detailed independent analysis of what dividends the company will pay in future, based on a deep proprietary understanding of the company's position, to compare with what the company is valued at on a forwards-looking basis by the market today, your comparison is not apples to apples. It's comparing history with the future and we all know past performance doesn't guarantee future results.

For example: Company X was valued at 100p a few years ago but due to trading conditions people doubted whether its 3p a year dividend was sustainable, so the share price was languishing around the 60p mark. The 3p looks good against 60p share price so you buy in.

Then the company updates the market with good news: current year profits will be materially above expectations and they will definitely be able to pay 3p dividends at the end of the year, and they expect to grow their share of the market next year with all the contracts they now have in the bag. They hope to be able to tick the dividend up a bit next year, after prudently maintaining it at 3p this year so they can use spare un-distributed cash to grow the business and deliver their expected good profits next year.

The market loves this news and the share price jumps to 90p which means the 3p dividend that they delivered last year and will deliver at the end of this year is a decent 3.3% yield, not bad for a company who is making good profits, likely to grow the div next year and is no longer stuck in a rut. The share price has moved upwards, entirely rationally.

However, if you are not intimately aware of the company's activities and don't keep on top of the announcements, there is quite a danger that you will conduct your cursory analysis and see "Aha, the price has gone up and the dividend has not, I should sell and reinvest".

Then you go and use the proceeds to buy into a Company Y, who just paid an unsustainable 10p special dividend after selling off a major part of its business and can be bought for 50p a share. "Cracking deal", you think, "this company is on a 20% yield and the dividend is up on last year". So you buy into that company that's slowly going bust and pays 1p next year and 0p the year after, with your proceeds of the company that was going to grow its business and improve its dividends next year.

Of course, no offence intended - I'm not suggesting that you only do such cursory reviews when evaluating your holdings and prospective purchases, and you might be much more sophisticated than the average casual investor we see on here.

However, I would beware of reading too much into something that has "worked very well for me" over a given period. Over the last 8 years for example, most equity markets have risen significantly, and all kinds of flawed strategies have delivered acceptable, or even great, results.

Companies paying reliable dividends have been treated especially well by the market, as cash interest rates and bond yields have collapsed meaning lots of investors who would not traditionally hold equities, have temporarily moved over to become "equity income" investors, dividend seekers, who don't actually want to be holding equities long term but are reluctantly doing that at the moment. So buying and flipping dividend-paying stocks as their yields decline has been lucrative, without necessarily being a solid strategy you could hang your hat on for the next decade.

All IMHO, dyor etc etc.

coastline

Vanguard rebalancing study...

https://www.vanguard.com/pdf/icrpr.pdf

https://www.nerdwallet.com/blog/investing/rebalance-portfolio-strategies/

Prudence1

Ray_Singh-Blue wrote: »

VLS80 has returned 23% this year. As it makes up 75% of your porfolio, I would expect your returns to be higher?

The percentage I gave was annualised return since inception. Sorry, I ought to have said.

darkidoe

Economic wrote: »

Supporters of rebalancing seem to assume that all sectors are in a cycle of booms and busts (what goes up must come down and what goes down must come back up), but there may be sectors that are in long-term decline where it would be unwise to keep investing more and more, which is what rebalancing would imply.

Ahh the turnover in tracker funds in itself will separate the wheat from the chaff.. With trackers you only invest in the cream of the top!

Re-balancing is a simplistic way of trying to gain relative value in the market, buy more of relatively undervalued assets +/- sell more of relatively overvalued assets. Simple to understand, no-frills, no-nonsense based on simple concepts. Almost elegant.

I think what you would call resetting your allocation would be rebuilding your portfolio in view of market conditions/changing attitudes/investing perspective/new knowledge. I think that would be reasonable as well as we learn more about ourselves and the general market and as the world changes. But I wouldn't do this more than once every few years. Definitely less often than re-balancing.

The specific ideal allocation doesn't exists or even matter as long as the general principles are solid and sound.

Nick_C

bowlhead99 wrote: »

The problem with that approach of being yield focused and selling out when a company no longer fits the box, is ...

As I said, some people will be horrified by this approach!

All I can say is it has worked well for me. Over the last 8.5 years, I've had an average annual rate of return of 18%, I've beaten the FTSE 100 by 30%, and I'm not paying a fund manager.

I am looking at profit forecasts, projected dividends, and dividend cover (dividends as a percentage of profits) as well. And I was also investing for capital growth until a couple of years ago. I did well on companies that were not paying dividends such as IAG and Lloyds.

bowlhead99

Nick_C wrote: »

All I can say is it has worked well for me. Over the last 8.5 years, I've had an average annual rate of return of 18%, I've beaten the FTSE 100 by 30%, and I'm not paying a fund manager.

Beating the FTSE 100 by only 30% over 8.5 years sounds pretty terrible to me. The FTSE 100 has been a pretty poor benchmark against which to measure yourself over the last couple of decades. It only covers equities listed in one small country and it is incredibly heavily weighted to a few major companies and industry sectors (banking, oil, big pharma).

If you had invested in the FTSE World index for the last 8.5 years (since 30 June 2008)you would have more than doubled the performance of the FTSE 100 with your eyes closed.

Perhaps for some reason you don't trust the overseas markets where over 90% of the world's companies are listed. Ok, so if you had instead invested in the FTSE 250 index you would have also about doubled the performance of the FTSE 100, with your eyes closed.

If you had wanted to invest only in UK companies and wanted to put about half your money in mega sized companies and half in mid sized companies, you could have just done a 50:50 split between a FTSE 100 index tracker and a FTSE 250 index tracker, and would have beaten the FTSE 100 by over 30%, with your eyes closed.

So, you should definitely not be patting yourself on the back that you managed to waste over 8 years of your life putting time and effort into pursuing a strategy which would have been roundly beaten by a typical investor's equity allocation using active or passive funds, after paying management fees. There would have been absolutely no shame in paying fees, given you would likely have ended up with the same or better results.

Of course if you love doing it as a hobby, that's fine, but you can see why many people would be horrified by your approach, as it's a lot of effort considering it didn't deliver particularly special results.

I am confused by your comment that over the last 8.5 years your average annualised return is 18%. 18% compound return for 8.5 years is 308% total return or literally quadrupling your money. Meanwhile the FTSE100, divs reinvested, has not even doubled. So, the statement that during the period, you beat the FTSE by only 30%, doesn't square up at all with what is implied by getting 18% average rate of return.

I am looking at profit forecasts, projected dividends, and dividend cover (dividends as a percentage of profits) as well. And I was also investing for capital growth until a couple of years ago. I did well on companies that were not paying dividends such as IAG and Lloyds.

It sounds like you are doing a lot of work on your portfolio to pick the stocks to buy or sell or hold - which is not necessarily paying off, assuming you beat the FTSE 100 by only 30% rather than 300%.

And it is not a great demonstration of the power of the model if you give us its returns for 8.5 years but then casually throw in "and I was also investing for capital growth until a couple of years ago". So that means that your strong returns (of ftse100 + 30% over 8.5 years) were not driven by your current model but by a different model.

For example, buying Lloyds when they were not paying dividends is quite a long way removed from investing for income, projected dividends etc. When their price went up from 20p to 30p, 40p, 60p and they were still not increasing their dividends, the model you now advocate would tell you to sell... i.e." if the price has gone up and the dividend hasn't I sell and reinvest".

There are many ways to skin a cat and I don't want to sound like I am just writing long posts berating other people's strategies for the fun of it. However, my original comments were along the lines of:

1) you may feel your approach has worked very well for you but in reality the results might be pretty mundane considering all the work you are putting into it.

- This seems to be borne out by your performance figures of only beating FTSE100 by 30% in the 8.5 years.

2) the returns you got from a dividend yield focus in recent years have been flattering because equity income has done very well as an asset class due to a range of cyclical factors. This includes global interest rate and bond yields reaching the lowest point in history, with a lot of investor money seeking yield and "bond proxies" in a way they did not do a couple of decades ago and are unlikely to repeat in the future (assuming interest rate and bond yields don't stay at the lowest point in history, forever).

- That still seems to be the case.

So basically your results over 8.5 yrs were partially driven by your being fortunate to invest in the right thing at the right time, and partially driven by you changing strategy part way through the period, and yet you still didn't beat an average world tracker or a 50:50 mix of FTSE100 and FTSE250.

But if it keeps you entertained, more power to you!