20 Sep 2012, 11:43am
shares:
by

14 comments

  • September 2012
    M T W T F S S
    « Aug   Oct »
     12
    3456789
    10111213141516
    17181920212223
    24252627282930
  • Archives

  • 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 :)

     

    Good stuff, I have a couple of insurance shares that are taking their own sweet time to repay my faith, but are at least paying a dividend.

    (Want excitement? Try Resolution on a 10% yield!)

    As you know I think income is a great strategy for many people, but don’t be lulled — you can still be disappointed. From memory RSA slashed its dividend in the early 2000s!

    @Ermine- I’ve just done the opposite thing. Sold a block of shares at their highest and made a tidy profit. I agree October will see shares fall (they always do in October- why is that?) I also agree the Euro fiasco is not over and Draghi’s reassurance will only last so long. BUT, I now have the dreaded cash that I can feel eroding away day by day. I’ve used all my ISA allowance – what to do with it? I need the money early next year (around Marchish) so am left with easy access savings at 2.8/9%. Any other ideas most gratefully considered.

    Snap, almost. I bought RSA in two tranches in early 2010 and late 2011 and I am even on SP, so I suppose I’ve now got some divi benefit. A bit worried about sustainability of the latter, but intend to hold long term unless they take off (unlikely).

    I’m quite a fan of insurance for the income, but it helps to dip in at the right time or, at least, not at the wrong time.

    @Monevator Blimey, Resolution, eh – I’m more of a fan of a comfortable ride than that ;) Yep, usual Ts and Cs apply, which is why I’ve aimed for two representative firms in a secotr as well as sector diversification. A HYP is kind of restricting there as it tends to favour certain sectors, and this ISA is still a little too small to get away with the two firms per sector line.

    @Romany if you need the cash in March you’ve done the right thing, and presuambly whatever it’s going into in March will diversify you from cash. There’s nothing wrong in taking a profit, particularly less than fve years from needing the readies. The issues with cash are a little bit longer term IMO. All my pension AVCs are in cash (because i thought I’d have to liquidate the fund on leaving The Firm, I thought wrongly as it happened). There’s an uncertain time period of five to 8 years to release that, and I am thinking of partially re-entering the market on the grounds I know the value of cash will be reduced, whereas stocks hedge that a little. However, five years is pretty much the minimum period one should consider for shares, even indexing ;)

    So for six months sit tight and enjoy the reduced stress – the stock market could hammer the value of your stake faster than Bernanke and Co so cash is the place to be!

    @SG Go on, rub it in ;) I’m happier with RSA than Aviva, though I have the latter as well. That’s even though RSA is the portfolio dog, but I agree with the guy on Motley Fool who said AV. seems to act like a Europanicometer. Should make for some, er, buying opportunities then!

    At least you’ve got a reasonable dividend and I’m sure the price will increase over the next ten years. Who knows maybe the stock will split. Insurance is a smart place to be.

    […] Turning from residential property to equities, Simple Living in Suffolk considers the redeeming value of sitting on your hands and doing nothing in the market. […]

    Good to see those stacked charts getting an airing. Would be really interesting to see what happens in the long term, but I would imagine that reinvested dividends might be a dominant share of the total for some companies.

    Of course, technically those dividends are always included, but if you time your buy badly you still get the same dividends as everyone else… you just pay a bit more for them. Looking in the long term that can redeem a badly timed buy.

    @g insurance seems to have served me okay even with this one. I was tempted to buy more in the down parts but I’m already a bit heavy on the sector.

    @Rob I hard a really hard time trying to re-order them, but the stacked chart, in particular the forcing apart of the fingers of the purchases with divis really brings that cumulative benefit home.

    I don’t usually reinvest the dividend in the specific firm, I add it to the funds I put in and usually invest in somethign else in trying to keep my asset allocation roughly on track

    […] being offered at less than RSA which is a share I own. I’m thinking of hitting this in my ISA, which happens to have a lot of space in it due to […]

    […] going to buy and hold for dividends, what you pay in the first place matters. I took some learning from RSA, who at least I am square with now – the loss of capital is counterweighted by the […]

    […] of old trading  folly in the ISA at first before I straightened myself out and learned some of the art of sitting on my hands, the next year I read this and got myself onto the right track. One of the entries in my ISA, […]

    […] sell some shares – but which ones? I’m not good at making sell calls, and very good at sitting on my backside doing nothing, so selling shares is a decision I don’t want to make. […]

    […] period all you needed to make money in the stock market was to have a pulse, actually be in it, and not screw up. It’s been getting harder and harder to find much worth buying, and what with the relative […]

    […] applied the knowledge to my investing. Trading costs you money. So I stopped selling, and made it a priority to sit on my backside and take the […]

     

    Leave a Reply

    Your email address will not be published. Required fields are marked *

    You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

     
  • Recent Posts