long term investment portfolio

[Lizard]

Looking at the Smartshares and AMP WiNZ funds as proxies for shareholdings suggests that they are unlikely to provide a portfolio on their own that would meet the required return on a buy-and-hold basis, since only the OZZY and MOZY have achieved returns over 8.5% pa on a long-term basis (and that appears to be skewed by good results soon after inception). It is possible that they might meet the requirement if a re-balancing strategy was used that included fixed interest and perhaps property trust assets, as it seems Snoopy, myself and (presumably) Old Rider have been doing. It would take some considerable calculation to test this theory though and I am still rather dubious that they could achieve it, since annualised 5 year returns for TENZ, OZZY and WiNZ are -2.47%, 6.21% and -1.61% respectively. (Also note that WiNZ reports on a gross return basis and the other two are after tax but pre-management fee and presume dividends are reinvested)

One point I've found is that extra caution is needed to keep a fairly generous cash portion for an investor who is reliant on income from a portfolio. For an investor with a $500k portfolio and 20% of it in cash, spending $30k per year can really hinder the effectiveness of a re-balancing strategy. Not sure there are any really good mechanical strategies to get around this, but having insufficient cash to reinvest near the bottom can destroy the hard work of many years. For example, if the $400k was in shares and the market crashed 40% in a year, then (assuming a steady downtrend), the client would end the year with about $62k in cash and $248k in shares, but would have only transferred about $8k across into shares through re-balancing, with just $2k going in at the bottom i.e there is not much ability for re-balancing to recover funds for them, other than to throw caution to the winds and plough the remaining cash into shares at the bottom. Anyone in this position would either need to be prepared to hold a lot more cash or put the time and effort in to a much more active strategy rather than a mechanical re-balancing system.

[percy]

Plus not having any real investment disasters to drag down my good work was useful!

SNOOPY

I think this statement is very important.I note when talking to my friends about how their year in the market has been it is so often;" I would have had a great year if it hadn't been for xxxxxxxx which fell out of bed and brought down my whole year's return."
So for a long term portfolio avoiding disasters would appear to be more important than big winners.
Yield stocks rather than growth stocks ,however, one must be very confident the yield is substainable.

[voltage]

rebalancing portfolios between cash and shares must become a lot more difficult if you have a collection of individual shares due to selling and buying small amounts. Using a fund this is a lot easier to rebalance

[Lizard]

rebalancing portfolios between cash and shares must become a lot more difficult if you have a collection of individual shares due to selling and buying small amounts. Using a fund this is a lot easier to rebalance

I would say just don't get too pedantic about it or re-balance too frequently. Have a fairly wide range for individual holdings - e.g. if your average holding is $8000, you don't have to take action unless it falls below $4,000 or rises above $16,000. And even then, if the portfolio is growing, the size of an average holding can creep up as well.

Using a fund might be simpler, but unlisted ones may have higher entry/exit fees/spreads which make re-balancing more expensive.

[OldRider]

Lizard:

Until I read your last post I was thinking you did mechanically rebalance at certain times, and that I was
rather different to this.I see this is not so.

The proportions we use as posted earlier are for when the market is operating "normally"
If one follows the pattern too rigidly then due to the stability of cash,
a shift from cash to shares is needed when the market has fallen,
just the opposite to the pattern I would follow, and as you pointed out there is not enough cash for this.

We do have an overall policy of reducing the share portfolio 5% downwards after a each 5% drop in the market and allowing this
to collect in our cash account, presently this is rather higher than the 2% guide sp quite unbalanced!. This was another part of our
thoughts in having some LIC holdings, as a reduction in a LIC holding mostly covers the market and makes the
choice over which companies to reduce easier.

Moving cash to a term deposit or bonds from profits is a rather easier decision.

To repurchase shares we have criteria as well, only rebuying when the market is trending up and
the 20 day ma over the 150 day ma

[Snoopy]

Hi SD
So over the last 10 years what percentage of your portfolio's performance has come from dividends with and without RBD?

SSD, I need to back track your question a bit before I answer. I have done quite a lot of portfolio reorganization over the last 10 years. So while I have held seven of my nine NZX shares for 10 years (the two exceptions being TUA and NZS), I certainly haven't held them all in 'target quantities' (that I have now achieved) for 10 years. I am saying this because it is probably unrepresentative of me to report my 10 year portfolio investment return when technically I haven't held that portfolio for 10 years.

Secondly although Restaurant Brands has been my star NZX performer, and I always had faith that my 'buying when prices were low' would pay off, I didn't expect RBD to do as well as it has done. Conversely there are other shares that I have purchased where my expected share price recovery has not occurred, well not yet anyway. While my selection of RBD looks good now, it didn't look quite so clever at the time I was buying it. Conversely again I haven't written off some of my other buying decisions as 'not so good', just because they have not done so well yet.

My quick answer to your question SSD is that with the RBD share price at around $2.30, then I am up about 90% on my average purchase price in capital terms. If I assume a constant number of shares held over ten years (not accurate in my case), then dividends received would add up to about 80% of my average share price purchase. With my prudent purchasing I am looking at a +170% total return over that 10 year period.

The rest of my NZX portfolio has not performed like this. TUA for instance is sitting at my average purchase price. But the dividends over the last five or so years that I have held these TUA shares have been huge, something like 10-12% per year. That is one extreme case.

In another extreme, NZS I am holding at a loss, although not as big a loss as many investors (I paid an average of 80c a share for mine, SP now 71c). NZS are yet to declare or pay a dividend. Nevertheless in portfolio terms such losses wipe out some of my RBD gains.

Without doing a specific '10 year calculation' on my current 9 holdings, which I have explained wouldn't really mirror how I have done anyway, I would estimate my net contribution from dividends in portfolio is around 60-65%, with unrealised capital gain of 35-40% over 10 years sitting ready to harvest if I so choose. Take RBD out of the equation and I am probably looking at 70-75% of my NZX portfolio return being from dividends, maybe even more!

This is possibly a higher proportion from dividends than the average investor. Then again I have set out to invest in high dividend paying shares! However if you consider that I have no company 'bonds' or debentures (which generally have no capital gain if you hold from inception to maturity) my combined NZX shares and bonds portfolio return is probably closer to what the mythical average investor might anticipate.

SNOOPY

[Lizard]

Thanks Old Rider! I am finding your comments really useful.

Thinking about it, I guess investment performance is the combined product of investment/stock selection, investment timing, portfolio construction and portfolio management. We talk a lot about the first two on ST, but not so much about the second two. Probably that's partly because the "right" answers are going to be a lot more personal, since they depend a lot on the % cash inflow/outflow occurring. Interestingly, perhaps the best construction and management could be determined by how good an investor is at investment selection and timing. Yet, in general, most advice on portfolio construction is based on an investor making average or market-equivalent decisions. An investor with random stock-picking and investment timing skills is probably best with a straight re-balancing scenario, but one that has greater skill in stock-picking can let individual stocks run, while an investor confident about their market timing can take a less balanced approach between investment types and geographies.

My own methods were originally based on having little confidence in my own stock-picking and timing. However, in thinking about it, over time the flexibility that is evolving is gradually reflecting increased faith in my investment skills and the re-balancing aspect has been watered down somewhat. It is difficult to say whether this has improved results - since the past few years have been more difficult ones than earlier years, so I can't see an obvious increase in returns at this point. (Also not helped by having had less time of late to put those investment skills to use - which tends to put timing out the window.)

[Lizard]

Sort of set me off now... researching more ideas on portfolio construction...

Tim Farrelly seems to be something of an Aussie guru in portfolio contruction. His philosophies make good sense - forgive the dull formatting and read them on his web-site or quoted below:
http://www.farrelly.com.au/philosophies.html

Portfolio Construction Principles

Long-term return forecasts can be a vastly superior guide to the future than historical returns.

• Breaking returns into the three components income, income growth, and the effect of changing valuation ratios can provide clear insights into future returns
  
• Long term forecasts of asset class performance are generally far more reliable than short term forecasts, and infinitely more reliable than historical extrapolations
  
• Using past sector performance as a guide to the future is worse than meaningless. It is generally a counter indicator.

Risk, like beauty, is in the eye of the beholder. It is best assessed with the investor in mind.

• All risks that are relevant to the investor must be considered.
  
• Most risks faced by private investors can be grouped as affecting long term real returns, liquidity or peace of mind.
  
• The key risk faced by most investors is having insufficient long-term, real returns to satisfy their cash flow needs
  
• The most important risk to any investor is rarely associated with a Greek letter
  
• The one risk that investors should not have to worry about is someone else’s business risk

Portfolio’s should be built to meet investor cash flow needs

• The main driver of portfolio construction should be meeting investors cash flow needs with an acceptable level of certainty
  
• Portfolios don’t have to be theoretically perfect, highly efficient and robust will do.
  
• Taxes, transaction costs and fees can represent over 50% of returns, they must be factored in to all decisions.
  
• Business risk should never be the key driver of portfolio construction.

[h2so4]

SSD, I need to back track your question a bit before I answer. I have done quite a lot of portfolio reorganization over the last 10 years. So while I have held seven of my nine NZX shares for 10 years (the two exceptions being TUA and NZS), I certainly haven't held them all in 'target quantities' (that I have now achieved) for 10 years. I am saying this because it is probably unrepresentative of me to report my 10 year portfolio investment return when technically I haven't held that portfolio for 10 years.

Secondly although Restaurant Brands has been my star NZX performer, and I always had faith that my 'buying when prices were low' would pay off, I didn't expect RBD to do as well as it has done. Conversely there are other shares that I have purchased where my expected share price recovery has not occurred, well not yet anyway. While my selection of RBD looks good now, it didn't look quite so clever at the time I was buying it. Conversely again I haven't written off some of my other buying decisions as 'not so good', just because they have not done so well yet.

My quick answer to your question SSD is that with the RBD share price at around $2.30, then I am up about 90% on my average purchase price in capital terms. If I assume a constant number of shares held over ten years (not accurate in my case), then dividends received would add up to about 80% of my average share price purchase. With my prudent purchasing I am looking at a +170% total return over that 10 year period.

The rest of my NZX portfolio has not performed like this. TUA for instance is sitting at my average purchase price. But the dividends over the last five or so years that I have held these TUA shares have been huge, something like 10-12% per year. That is one extreme case.

In another extreme, NZS I am holding at a loss, although not as big a loss as many investors (I paid an average of 80c a share for mine, SP now 71c). NZS are yet to declare or pay a dividend. Nevertheless in portfolio terms such losses wipe out some of my RBD gains.

Without doing a specific '10 year calculation' on my current 9 holdings, which I have explained wouldn't really mirror how I have done anyway, I would estimate my net contribution from dividends in portfolio is around 60-65%, with unrealised capital gain of 35-40% over 10 years sitting ready to harvest if I so choose. Take RBD out of the equation and I am probably looking at 70-75% of my NZX portfolio return being from dividends, maybe even more!

This is possibly a higher proportion from dividends than the average investor. Then again I have set out to invest in high dividend paying shares! However if you consider that I have no company 'bonds' or debentures (which generally have no capital gain if you hold from inception to maturity) my combined NZX shares and bonds portfolio return is probably closer to what the mythical average investor might anticipate.

SNOOPY

SD really interesting and thanks for sharing.

The high dividend return as a percentage of your returns ties in well with some data I uncovered on returns in range-bound/bear markets in the US.

% of total returns from dividends
1906-1924 97%
1937-1950 106%
1966-1982 65%

Markets punished growth stocks in these markets. However holders of dividend stocks were rewarded by receiving dividends while waiting for the next business cycle.

Of course this doesn't mean that growth should be ignored but it certainly does mean any growth has to be almost guranteed to be recognised in these types of markets.

PE ratios were interesting, where low PE stocks were also rewarded. Of course there are other things to consider when choosing a low PE stock for your portfolio like quality, growth and valuation.

[OldRider]

We have a spreadsheet that calculates proportion of income from dividends and growth for our holdings
This figure varies wildly from year to year.
For the last 10 years it has been 49.95% dividends and 50.05% growth (includes this year)
Last year it was 31.72% dividends and 68.28% growth
For nine years prior to this year 39.84% dividends and 60.16% growth