How to build a systematic portfolio with Stockopedia - Part 1

Friday, Feb 08 2013 by
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How to build a systematic portfolio with Stockopedia  Part 1

Getting started in the stockmarket 

Having taken the decision to invest directly in the stockmarket, investors face a plethora of tough questions about how to build and manage an investment portfolio. In the past, these perceived complexities have often been enough to drive even the most ardent DIYers back in to the arms of expensive and often poor performing fund managers. But there are relatively painless ways to manage your money using systematic approaches to the market, and using the tools available at Stockopedia, we are going to show you how to do it. 

This article is the first in a series of briefing notes that start at the moment you opt to take direct control of your investments. Throughout the series, we will examine the key things to consider when getting started, suggest proven strategies and show you how using our tools can help you to hunt down the shares that might suit you. We will also look at how you can go on to track and maintain your portfolio while keeping costs low, performance high and volatility under control. 

How much money do you want to invest? 

Although it sounds rather obvious, it is essential to consider how the size of your initial investment pot impacts your investment strategy. Regardless of whether you intend to drip money into the portfolio over time, if your initial investment is too small the costs of investing and managing a portfolio will be disproportionately high versus a managed fund. It may also mean that you end up running an overly concentrated portfolio (highly dangerous, unless you really know what you are doing). The larger your capital pot, the lower the relative costs will be and the more you can take advantage of the broader diversification that systematic investment strategies prefer. Here is why: 

Mind the costs!

Costs and fees can be a huge drag, eating up your performance. By opting to invest directly in the stockmarket you will be dispensing with the conventional costs associated with buying a fund. Advertised fund charges can be as low as 0.75% per year but in reality these cosmetically low charges can mask a range of trading or intermediary fees, which can inflate the typical costs to close to 4%. Casting off these charges is undoubtedly a major attraction but a self-invested portfolio does come with its own costs. These include: 

  • Stamp Duty : 0.50% - a tax on all stock market purchases
  • Commission : approximately £10 per trade with typical brokers
  • Bid/Ask Spread : 0.50% - the typical difference between the buy and sell price
  • Information/Advice/Subscriptions: e.g. a Stockopedia Subscription of £179.99 per year 

Based on these costs and assumptions, our analysis at Stockopedia shows that the optimum starting investment pot for a DIY investment strategy should be £30,000+. You can see details of that analysis here (and we will examine it further later in the series), but at £30,000 the costs of investing and managing a portfolio of 25 shares should be around 2.5%. That assumes that you rebalance 80% of the portfolio annually – which may be rather high, but is the average portfolio turnover rate of a typical investment fund. By comparison, the same portfolio with £10,000 to invest would attract charges of 6.60% - at this level of portfolio size, you are better off either investing in a fund/ ETF or picking your spots by owning many less shares. 

A systematic approach to building a portfolio 

At Stockopedia, we are huge believers in using the highest quality fundamental database and robust quantitative strategies to screen the market for investment opportunities YOURSELF. After all, it's not rocket science - as Warren Buffett once said, “Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ” - and using intelligent screening-based approach is all your fund manager is likely to be doing anyway. The technology now exists to disintermediate the City altogether and save on those egregious fees. 

The first thing to recognise though is that you’re unlikely to achieve alpha by listening to supposed broker ‘experts’ or swapping tips & stories on bulletin boards – the market is generally far too efficient for the first approach to work (quant funds are data-mining broker recommendations the moment they are released). As far as forums go, while they can certainly be a useful way to get feedback on ideas, it's worth being very cogniscent of the behavioural traps that can lead you astray (such as confirmation bias, namely only listening to those that agree with you). 

Instead, successful investing is going to take independent thought/analysis and some hard graft. Still, regardless of your investment preference – whether it is for value, growth or income stocks – it is possible to build a systematic investment process that has good odds of beating the market (click here to read more on why we think that). Historically, the financial data and algorithms required to screen the market in this way have typically only been available to the larger institutional investors such as hedge funds. That is no longer the case. 

 Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »

To assist you, we have built tools at Stockopedia which enable you to create a detailed investment model and investing process using the very best data available (we use the Thomson Reuters database, just like the major institutions). Not only that, but you can get inspiration for your strategy from one of more than 60 tried and tracked GuruModels. This means that, from the start, you can build up a list of potential stock candidates by selecting a strategy and tweaking the parameters according to your objectives and your attitude to risk (we call this ‘forking’). 

Avoiding errors, one step at a time... 

Systematic screening like this can help avoid the natural but potentially disastrous behavioural instincts that can lead investors into making the wrong decisions. It’s human nature to be prone to behavioural biases like selling too early, buying popular stocks, over-trading and emotional attachment to mistaken judgements. The adverse impact of these behavioural traps can be significantly reduced when you rely on fundamentals and put a sound portfolio management process into place. As Buffet’s right hand man Charlie Munger has noted:

“You can learn to make fewer mistakes than other people – and how to fix your mistakes faster when you do make them.” 

By developing a systematic investing strategy, you are less likely to make potentially costly changes at the wrong moment. Changing strategies to chase returns, tinkering with lists (based on media perception), failing to cut losses and even topping up winning positions can ultimately be destructive, as we will explore later on in the series. But that’s not to say that stock screening is where the story ends; most of us will be stock-pickers or hunters, rather than quant farmers (we discuss the difference here), so a systematic approach will likely be a stepping stone for further qualitative research into individual stocks. 

Next up… a strategy for value investors 

In the next article we will introduce the first of our three preferred house investing approaches at Stockopedia – “Value”. Value investing, or buying attractively priced stocks with some confidence that their prices will eventually rise, is among the most popular approaches to investing. We will look at a highly effective starting strategy inspired by influential investors and academics including Joel Greenblatt and Joseph Piotroski. We will look at the advantages and potential risks of the strategy and which types of investors might like it. 

In this series:

 


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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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About Ben Hobson

Ben Hobson

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Strategies Editor at Stockopedia.  I make sure that Stockopedia is delivering the features that its members want to see.


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