Risk, Returns and Optimising Performance

There are various straightforward steps that self-directed investors can take to evaluate their portfolio and ensure it is balanced, appropriate to their needs and producing optimal returns. This is my personal checklist.

First, understand your own attitude to investment risk. When you measure risks and returns, please remember they are affected by a number of factors, including equity and bond returns, currency movements, interest rates, inflation and taxes.

Consider your risk profile in the range of 0 to 100, where 100 = all equities and 0 = all cash or bonds; so, for example, 60 = 60% equities and 40% cash or bonds.

Your risk profile is a personal choice. Typically, younger people favour higher risk and more in equities. Those in a position to risk more may have a higher allocation to equities. A good rule of thumb is to have at least five years of your typical expenditure held in cash or near liquid investments.

Investments cover a range of assets, including shares (equities), bonds, private equity, property, art, wine and other investables, and cash (count mortgages and other debt as negative cash, and interest paid on them as negative income).

It’s important to analyse your equity investments by sector (for instance technology, pharma, energy, mining, finance, retail, etc) and by country/geographical area. In particular, you need to be aware of home country bias (holding a large part of your portfolio in domestic shares compared with the benchmark).

What about fees? These come in many forms, including wealth manager/adviser fees, platform fees, fund fees and transaction fees. The folk at financial advisory firm Y Tree, who have done the research, tell me that all-in costs of 3.5% a year are not unusual. Most wealth managers charge more than 2% when you include all their costs.

Performance evaluation

You should use a benchmark that reflects your risk profile. And you should ensure that your performance data is net of all fees. Too often there are fees that are not readily obvious, transaction costs being one example.

Many DIY investors use well-known benchmarks such as the FTSE 100 index, but this is incorrect. If your risk profile is 60, for example, it would be more appropriate to use a 60/40 blend of the MSCI Global Index and the Bloomberg Global Aggregate bond Index (GBP Hedged). Importantly, the FTSE 100 omits dividends, so it’s more useful to use a performance benchmark that includes them.

Avoidable risks

The following can quite easily be avoided, thereby enhancing your returns:

High fees for average performance. Passive trackers that mirror global indices or major indices such as the S&P 500 have annual fees of only around 0.1%. Make maximum use of these. Carefully evaluate any wealth manager/adviser fees.
Lack of diversification, in particular home country bias. Sector bias also increases risk. You should also beware of having a large number of active funds which effectively mirror the index, rather than using an index tracker with much lower fees.
Trying to time the market. Research shows that much of the returns that follow a bear market are generated in the early period following the low point of the market, and that it is a mug’s game to try and guess when this will occur. It is therefore best to remain fully invested in the market. Excess cash is an avoidable risk.
Not accessing the illiquidity premium of private equity. Historically private equity has outperformed the global stock market. The logic is that you have to invest for a long period if you invest in private equity, so investors should expect a higher return for not being able to sell their shares until a liquidity event occurs. Private equity funds typically require investors to invest a minimum of £5 million plus. However, there are a number of quoted Private Equity funds through which ordinary retail investors can get access to the illiquidity premium of PE.
Not buying investment trusts that are trading at a discount. Investment trusts generally trade at a discount to their net asset value (NAV) and much less often at a premium. Currently there are many trusts trading at a discount, some quite significant. Some of these may be a reflection of a disconnect between share price and NAV, as their NAVs are only updated at interim and final accounts. However, there is an argument that the investment trust sector is out of favour, and that when sentiment improves (it could be years) the share price will increase as investors return to the market, providing an added kick to returns. This requires taking a long-term view.
Trying to pick winning shares. You cannot beat the experts. It is their full time job. This rule may be anathema to many ShareSoc members who enjoy the fun of stock-picking, including me. By all means, feel free to have a small proportion of your investments in your ‘fun’ portfolio, but recognise the risks involved.
Tax. Tax wrappers such as SIPPs and ISAs are highly tax efficient. VCT, EIS, SEIS, etc are other vehicles to consider. Most AIM shares are classified as IHT-free (at present), as are business assets, woodland, etc. Make use of the most appropriate options for your portfolio.

In summary, there are various basic steps you can take to help optimise the performance of your portfolio. They are not rocket science, but should help to make it more robust and sustainable over the long term – and less likely to keep you awake when markets are choppy.

Cliff Weight, ShareSoc member

Post Date: September 5, 2024

Group description:	SIGnet Taunton is a new group with around 10 keen members at present, with a range of investment styles and experience. We welcome new members.
Meeting Type/Venue:	In person meetings at a golf club near to the centre of Taunton.
Meeting Frequency/Timing:	We meet on the first Monday of every month at a golf club near to the centre of Taunton, 11am until 3pm with a lunch break.

Group description:	An online group for those who are new to investing, or have only been investing for a few years. Including topics such as: – What is a share or a bond, why and how to buy them. – Comparing funds, unit trusts, Investment trusts and exchange traded funds. – Portfolio management and diversification. – ISAs, pensions, SIPPS and how to save tax. – How terms such as PE ratio and dividend yield are used to value a share. – How to use technical analysis or charting.
Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Monday of the month at 7:00pm.

Group description:	An online group for those who already have some experience in investing. Covering topics such as finding companies to invest in, financial statements and ratios, valuation / margin of safety, analysis of companies and investment trusts and exchange traded funds.
Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Wednesday of the month at 7:00pm.

Group description:	The Equity Income Group welcomes investors of all levels of experience, from beginners to advanced. The focus of meetings is on dividend paying Investment Trusts, though there is also discussion around individual shares.
Meeting Type/Venue:	Meetings are held online.
Meeting Frequency/Timing:	Meetings are held every 6 weeks on a weekday between 7 and 8:30pm.

Group description:	The Group welcomes investors of all levels of experience, from beginners to advanced. The focus of meetings is on all types of income generating financial instruments, from stocks through Trusts and Funds and ETFs to retail bonds. Meetings involve presentations from members, who are also expected to lead discussions from time to time, as well as discussions on what has been bought and sold since the last meeting.
Meeting Type/Venue:	Meetings are in-person in a venue in Central London.
Meeting Frequency/Timing:	Meetings are usually held on the last Thursday of every other month, starting with an informal lunch around 1pm followed by discussions until around 5pm.

Risk, Returns and Optimising Performance

There are various straightforward steps that self-directed investors can take to evaluate their portfolio and ensure it is balanced, appropriate to their needs and producing optimal returns. This is my personal checklist.

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Group description:	A welcoming group open to all types of investors. Typical meeting content is to have a deep dive presentation on a topic selected by the participants and a session on buy/ sell/ key lessons learnt last month.
Meeting Type/Venue:	In person at a friendly pub close to Piccadilly Circus
Meeting Frequency/Timing:	Monthly during the evening on the first Wednesday of the month.

Group description:	Our group is a broad church that contains investors of varying experience. Our members’ backgrounds are diverse and include corporate banking, engineering, teaching and the leisure industry. We generally pick a discussion topic for every meeting, e.g. housebuilders or the defence industry, and members are invited to research and discuss different aspects or companies within that industry. We also discuss stocks and investment trusts that we have bought, sold or are interested in and the reasons behind our decisions, and try to make sense of the ever changing investment environment. Discussions are robust and challenging but we are a friendly and approachable group who welcome investors of all levels – we just ask that you contribute, at whatever level you can.
Meeting Type/Venue:	Our meetings are held in a private room at a nice pub near to South Ealing tube station (Piccadilly Line), not far from Ealing Broadway (District, Central and Elizabeth Line).
Meeting Frequency/Timing:	We meet every 2 months, usually on a Wednesday morning at 11am.

Group description:	All levels of experience welcome. A typical meeting agenda includes: – Macro Environment – Trades: Members review existing positions and identify securities with promising TA entry patterns or setups and with suitable risk/reward. Any security, long, short, futures, options may be considered. The convener takes actual positions in trades and maintains his own detailed ledger, accurately measuring performance of individual securities and cumulative activity. Members are notified by e-mail prior to the entries or exits that are decided upon. Following each meeting an updated copy of the ledger is circulated together with the next meeting agenda. Members may wish to maintain similar ledgers of their own but there is no obligation to do so. – Technical Analysis: Techniques and systems used in trades. Members can request discussion of particular aspects of TA.
Meeting Type/Venue:	Online via Zoom
Meeting Frequency/Timing:	The first Tuesday of every month from 7 to 9pm

Group description:	Open to all investors / people with an interest in investing. Typical meeting will involve members talking about recent purchases, successes, failures and possible future purchases. Also with occasional visiting speakers or members making presentations on a topic of interest.
Meeting Type/Venue:	We aim to meet on the last Tuesday of each month in a private room at a pub in Playhatch. Start time 7pm with members encouraged to meet up around 6pm for a bite to eat / drink before hand, if their diaries allow.
Meeting Frequency/Timing:	7pm on the last Tuesday of the month. Meetings likely to last about two hours but with informal ‘overspill’ before / after.

Risk, Returns and Optimising Performance

There are various straightforward steps that self-directed investors can take to evaluate their portfolio and ensure it is balanced, appropriate to their needs and producing optimal returns. This is my personal checklist.

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