I’m sure you’ve heard it said many times before that investment returns don’t correlate to our cycle around the sun, but a yearly review is still a good idea. In fact, reviewing a portfolio’s performance on an annual basis, rather than monthly or quarterly, is likely to improve returns by reducing the number of bad decisions caused by reacting to noise in the market and the media.
On that basis, here’s a review of how the UK Value Investor model portfolio has done these past 12 months.
First, some background
This portfolio began life with £50,000 of virtual money on March 1st 2011. Although the portfolio is virtual, my own retirement funds hold exactly the same investments.
At the start of 2012 the portfolio was valued at £46,535, had 18 holdings and 15% cash. The initial goal for the number of holdings was 20, but during the year I increased that to 30 to reduce risk – risk as measured by price volatility and the risk of making bad decisions caused by over exposure to any one company (i.e. the larger your position in any one company, the harder it is to ignore the urge to sell if the share price drops).
By the end of the year the portfolio had increased in value (with dividends re-invested) to £56,043, an increase of more than 20%. Cash is now just 3.4% of that value and the portfolio holds 25 companies, mostly from the FTSE 100 and FTSE 250.
Luck or skill?
You should always be very wary of the investor who attributes all their returns to skill. Investing in equities is very much a game of both luck and skill, and the trick is to use skill to make luck work in your favour.
I think some of the best indicators of skill over luck are dividend income and realised capital gains. Both these measures have, at least in the longer-term, much more to do with an investors skill (or application of a sound approach) than they do with the vagaries of a largely random market.
Dividends
Dividend income for the year was £2,659. Based on the value of the portfolio at the start of 2012 (£46,535) that’s an return from income of just over 5.7%.
By comparison, the FTSE 100 index tracker which I use as a benchmark produced an income of 3.6% during the year.
