2014 has been a bit of a damp squib for most UK investors. The FTSE 100 fell from 6,750 to around 6,600, aggregate large-cap earnings declined while dividends in total remained more or less unchanged.
About the only thing that increased dramatically was volatility, with near vertical declines and recoveries in October and December.
While 2014 failed to provide most investors with decent returns (myself included) it did provide me with a number of lessons which, if carved into stone and applied diligently through 2015 and beyond, should turn out to be far more valuable than the few extra percentage points I might have gained in a more positive year.
I've written about most of these lessons in recent months, so as an end of year round up I thought it would be useful to summarise them all here. Hopefully this might in some small way popularise the idea that an end of year investment strategy review is just as important as an end of year investment performance review.
Investment lesson 1: Focus on defensive sectors to lower risk
I call my strategy “defensive value investing" after Ben Graham's description of someone who would look to invest in “a diversified list of leading common stocks". It is still value investing, but at the more defensive end of that wide spectrum, focusing as much on high yields and low risk as on beating the market.
Part of my strategy for achieving that is to invest mostly in companies with long records of profitable dividend payments and progressive dividend growth.
However, sometimes a company has a grown its revenues, profits and dividends over many years because of a cyclical market upswing which is unlikely to last much longer.
This is a very different situation to a company where growth has been driven by long secular trends which are likely to play out over many decades, rather than cyclical trends which reverse every few years.
While I'm not totally against investing in cyclical companies I do want to limit the number of then which find their way into my portfolio, and at some points in 2014 it looked like I might end up with a defensive portfolio built primarily from cyclical companies, which isn't what I wanted.
So a few months ago I decided to add a new rule to my investment strategy, which is that cyclical companies should make up no more than 50% of the…
