20 Sep 2012, 11:43am
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  • the redeeming value of sitting on your hands and doing nothing in the market

    Here you go, an opportunity for a laugh at the Ermine’s expense 😉 There’s been one persistent dog in my ISA portfolio listing, Royal and Sun Alliance (RSA). There’s nothing particularly wrong with the company, but everything wrong with when I bought this share.

    RSA stock price chart

    Take a gander at the chart, and see if you can guess when I bought this. Yup, February 2011. I didn’t exactly hit the peak, but near as dammit. So this bad guy gets to look like

    In a previous life I’d have hated that SCREAMING RED You Screwed Up reminder, and be tempted to hit the conveniently placed sell button next to it in the portfolio form. So tempting, and yet so likely to lead to the sort of investment death that Pete Comley grouched about in his Monkey with a Pin book. With a growth share you just have to sweat it out or take the hit, there’s no Third Way.

    However, this was after I’d taken a decision to become more catatonic, though not in the classical way. I could’t see anything that had hugely changed about the company, so I left it to fester. It was down about 30% at the low water mark, and even now it’s 15% down.

    However, there seems to be a hidden benefit of a HYP in that there is a Third Way, compared to a growth portfolio. Firms that have a reasonable dividend paying history

    RSA dividend history

     

    which is part of what attracted me to the share, have a useful attribute. They slowly buy me out of mistakes like that. We always look at share price graphs, but since I own this stock my own representation of it does show the dividend return as well. Note I use monthly beginning values for the stock valuation graph otherwise Excel would consume all the memory in my PC, so it doesn’t show the price spike I bought on. I paid about 3100 in all for my share of RSA, including commission etc. Yeah, that was dumb. Presumably in Feb 2011 it looked to me like the recovery was well underway, or something just caused a rush of blood to the head…

    RSA valuation (monthly chart) stacked with the accumulated dividend I have got on my stake

    Now I still haven’t broken even on this, but I am £100 down on the purchase price, not £400. And RSA are slowly buying me out of my cock-up. It was still a mistake to buy the share when I did, but it shows the value of doing nothing. This is the only line of stock in my ISA that is down on a total return basis, though that’s easy to say at the moment when everything is riding high. And we should remember that the reference point, the numerical £ value, is being destroyed by Government action all the time…

     

    ISA valuation + cumulative dividend return graph. Note this is NOT a performance graph, most of the accumulated rise is because of purchases! I would be working for Goldman Sachs if this were a performance graph 😉

    It is instructive of plot all of the holdings in my ISA on a stacked chart, pinching the idea from Rob’s chart wrangling. Unlike his performance chart my chart shows the total value of the ISA over time with dividends added in. The vast majority of the change in value is due to putting money in and making purchases. What is visible there is that the dividends make an increasing proportion of the whole return for a stock as time goes by. This isn’t stupendously visible because my ISA is only three years old, though you can see that the small gaps are larger on the lower stocks that I purchased earlier; the accumulated dividend becomes a larger and larger part of the total return as time goes by. To make that clearer I’ve split this into capital value and dividends received

    capital value and accumulated dividends

    Because I am putting money into this the capital value will increase faster than the dividends, and will do for several years. In theory once I get to 200,000 in 17 years the dividend income will match the rate of addition and then outstrip it, but I haven’t got that much cash for this 😉 Nevertheless, the dividends have put in a decent 8.5% of the amount I have contributed so far. There’s no sense in extracting the cash from the tax-sheltered account while I still have cash outside, so this state of affairs will carry on for a few years.

    Although theory says a growth portfolio is equivalent, given an equal amount of risk, where you take the income if needed by selling off parts of the portfolio, being able to live off the income feels better. It also reduces the amount of decision-making. It is more expensive to sell off 2% of the portfolio by selling 2% of each holding as opposed to one stock to match 2% of the total value, but then which stock do you sell?

    It is clear that Slater had some point in that ‘elephants don’t gallop’. HYP stocks are mature firms in the Summer and Autumn of their life cycles (the Winter ones are the value traps 😉 ) The wildest party thrown in my HYP is the recent BAE EADS fuss, which is hardly a ten-bagger…

    I had to leave out National Grid form the plot because I couldn’t see how to represent the corporate action a while ago. I’ve put 28k into the ISA and TD list the capital value of the stock as £29k. However, neither TD’s summary or the chart allow for the £1500 cash in the account from a motley collection of the dividends that haven’t yet been reinvested. And a fair amount of this year’s allowance hasn’t been added, because it might as well earn me some paltry interest outside the ISA; I haven’t had much taste for buying this year or indeed the opportunity, since it took three months to shift my ISA from Interactive Investor. So the current snapshot return is about £2500 on an average stake of £14000, over a period of three years. The actual amount of dividends I have received is £2400. The yearly dividend rate as a proportion of the total invested by the end ofthe year was only 2.5% in the first year but shifted to 5% as I moved to a high-yield portfolio approach.

    The trouble with this is not the rate of return. It is the £10k p.a ISA limitation – it takes time to pump up an ISA enough to win a useful income from it, and that income only rises at about £500 a year. Wannabe early retirees take note; if you want an ISA to form part of your income stream, and possibly allow you to go for a late pension savings burn then you have to start early, like at least ten years before you want to retire! In the interim I have to use unwrapped holdings and cash. There are people like Bernanke and our own government desperately debasing the currency and falsifying the inflation figures at the same time, which makes the cash not in NS&I ILSCs a toxic non-investment horribly exposed to government confiscation by stealth.

    There’s also a lack of opportunity in the froth, I’d like another stock market meltdown like last summer, please, just without the rioting, thanks all the same. The Euro and Grexit don’t seem to be delivering yet – heck I am slowly building up a European Index position and it is running away from me rising which is not how this is meant to turn out. Mind you, there is the upcoming oil war on Iran to add to the mix, so the meltdown will probably appear in the near future. And October is coming up, often a good month for fear and loathing on the stock market 🙂

     

     
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