Idling away an hour on the long weekend, I found myself examining whether my mental model of how I invest is actually honest.
In particular I have an investment philosophy of holding for the long term, of buying (not selling). Is that true? How often do I in fact sell things?
My philosophy is to minimise fees wherever possible. But it is also to reinvest dividends manually, not automatically, so that I can rebalance as I go – rather than ‘high buying high, and low reinvesting little’. Moreover, my minimum amount for a trade in Mrs FvL’s account is only £1000 – the amount of cash that must accumulate before we reinvest it. So my philosophy leads to me making plenty of transactions, for which Mrs FvL pays full price. Does this lead to high trading expenses?
To answer my own questions I did the following analysis:
- I looked only at Mrs FvL’s portfolio history. I manage her portfolio using the same investment philosophy, but in a simpler/cleaner way, as my own. I track all of her transactions in one place, unlike my own funds. And though her asset allocation is slightly different (lower weight USA, more domestic bias), this shouldn’t materially affect a transaction analysis.
- I looked at the last tax year – i.e. the 12 months to 5 April 2019. This was a year in which I moved significant funds into Mrs FvL’s accounts, so there was more money to invest than normal – more than just dividends.
Mrs FvL’s portfolio has around 80 unique holdings in it. This is fewer than the ~200 in my portfolio, but is nonetheless highly diversified. Half of the value is in passive ETFs/index funds. The largest holding (an Australian Equity ETF) is about 8% of the total value, the biggest single stock is about 3%, and the smallest holding is worth about £2k.
Here is what I found:
- About 80% of her holdings paid out dividends (or interest income) in the tax year. The rest were mostly accumulating funds.
- We only sold 4 securities that year. Of these, one was an involuntary sale when our holding was acquired. A second was us closing out a position (Vodafone, in case you’re interested). The other two were reducing our positions but not eliminating entirely; in both cases there were purchases too during the year. This doesn’t feel very sensible.
- We made 144 purchases, across about half the stocks in the portfolio. Four of these were entirely new positions (Rightmove, a new Eurostoxx ETF, the Vanguard UK Long Duration Gilt index ETF, and the UK Index Linked Gilt ETF). The others were all topup purchases.
- Of the purchases, around 45 were ‘involuntary’ – either reinvested dividends (in a small account where accumulating cash is pointless) or in a managed pension fund; the costs of these will be low. Of the 99 ‘discretionary’ purchases, the average purchase value was around £3500, and they ranged in size from £1k to £11k.
Assuming each discretionary purchase cost around £20 (fees plus taxes), our trading here cost around £2k. Mrs FvL’s brokers/platforms are doing pretty well out of her. Very roughly speaking, I would attribute three quarters of these costs to ‘initial fees’ for deploying new money (about 0.5% of the amount invested), and one quarter of this to the cost of reinvesting dividends manually (about 2% of the dividends themselves). I think that, with 500+ transactions in total, Mrs FvL is doing pretty well out of her brokers/platforms.
If we doubled our minimum trade size, from £1k to £2k, we would have saved about 10 trades, or perhaps £200. This is not a material sum in the context of this portfolio.
In summary, I am reassured to find that my investment philosophy is working well.
- We do indeed Buy, not Sell. The portfolio is not suffering a lot of churn. Nonetheless the fact there are a couple of holdings we both bought and sold suggests, and I can’t easily audit why, suggests room for improvement.
- And though there are plenty of Buy transactions on the account – around 100 ‘manual’ ones in a year – the ‘excess’ cost of this is well under 0.1% (only a few bps).
- For the funds in my own accounts, I follow almost exactly the same approach. The only material difference is that my minimum trade amount is bigger – £2000 or more (depending on the account), and I have more US holdings (including tech, which often doesn’t pay dividends). So while the volumes/etc are bigger than those in Mrs FvL’s portfolio, I think the same conclusions will apply.
Finally, some questions for you and your portfolio:
- Have you thought about the unintended fee consequences for your investment approach?
- If you use Dividend Reinvestment programmes, are you happy to be reinvesting in the same holdings, not the ‘best ideas’ at that moment?
- Are you rebalancing your portfolio? If not, should you?
- When do you make trades? Is it based on newsflow? Or financial needs? Or a regular schedule? Or when you have enough cash to deploy? Is your answer to this the best answer you could give?
- Have you bought and sold the same thing in the same 12 month period? Would you know? Would you do the same thing if you had those 12 months again?