For the past three years, private investor Jon Wild has been running his own ISA portfolio. In 2009, at the depths of the financial crisis, he first laid out his plans on Morningstar.co.uk, and a year later in 2010, after a substantial recovery, I checked in with him to see how his portfolio was doing and what changes he’d made. Now, with ISA season looming large in 2011, what progress has he made and what are his next steps?
“With the ever growing costs of a young family, I wasn’t able to invest as much into my ISA over 2010 as I would have liked and investments were suspended a few times to cope with more immediate needs,” Wild says. That said, he’s made some significant investment decisions over the past year with regards to his ISA investments.
When I last spoke to Wild his ISA portfolio was hovering around breakeven on a total return basis. Wild said at the time that he was in the process of moving away from individual stocks after learning the hard way the risks of putting your eggs in a few baskets rather than diversifying your assets. Since then he’s built up his ETF (exchange-traded funds) holdings so that his portfolio is now split roughly 50/50 in terms of assets between individual equities and ETFs.
Not wanting to rub Wild’s nose in it too much, but let’s take a look at some of his equity decisions. Wild has two financial holdings. One is in investment bank Evolution Group, which after a rough 2010 is currently down 40% from where Wild first bought it. His other financial holding is Lloyds Banking Group, shares in which are still a long way from pre-crisis levels and, Wild guesses, will be for some considerable time. “It’s a little ironic for someone who works in financial services that I'm much worse at picking financial stocks than stocks from other sectors.”
In other sectors, Wild’s ISA portfolio contains shares in Vodafone (VOD) on the telecoms side, which has continued to grow and pay a steady dividend, and United Utilities (UU.) among the utilities, the income from which has meant that Wild is “just about in profit”.
In order to diversify—albeit only within equities—Wild has taken up a position among natural resource stocks and made an “opportunistic gamble” on the recovery of BP. “I started to build a holding in early October; My view was that they would get over the disaster in the Gulf of Mexico, emerge a more focussed and responsible company; and resume paying their dividend. The dividend will resume in 4Q 2011. Time will tell on the rest of my opinion.”
Holding shares in AstraZeneca for two and a half years had generated profits of around 30% with dividend reinvested so last October Wild felt this was all he was likely to get from the stock so sold his entire holding in the pharmaceuticals group and used the proceeds to buy into a BRIC 50 ETF. “My own view is that the BRIC countries have a testing few years ahead of them but will be the biggest mid to long term source of growth. I'm looking at this investment over 10-20 years and plan to slowly build the holding by drip feeding in payments and reinvesting the dividends that the fund pays. This method of pound-cost averaging means that even if his investment suffers a volatile ride—something not uncommon when it comes to investing in emerging markets—Wild’s returns will be smoothed out. (Read more in How Pound-Cost Averaging Can Smooth Your Returns.)
Among his other ETFs, Wild says they have all generated positive returns since he first purchased them, although the corporate bond ETF has returned “pretty much to where it started”—not wholly surprising given the low-rate environment.
So 2010 taught Wild some important lessons about spreading risk and attempting to time the market, what’s on the agenda for 2011? “The coming year will see me attempt to move house so most of my spare money will be tied up in that and I may even need to raid my ISA for funds, although I hope to avoid this,” he says. “Any investments that are made this year will go into building the ETF portion of the portfolio.”
If, like Wild, you have some spare cash and want to test your stock-picking ability, we strongly recommend you do your research and are prepared to hold your equities for the long term—at least five years. At Morningstar, we’re strong advocates of funds because they give you very good diversification—you’re not putting all your eggs in one basket. Stock-picking may work for the sophisticated investor who's going to pin all their hopes on the recovery of one bombed-out stock, but generally we think big funds are the way forward. If this is your first foray into investing then you would do well to look into a global fund—possibly to diversify away from the home bias you have about being in the UK. You could consider an asset split between equities and bonds, again to lower some risk. One really easy way to do this would be to use an ETF or a tracker. They’re very cheap, the only risk you are taking on is a market risk, and they’re diversified.
But before you start investing take a breath and think about why you’re investing—what do you want to get out of it and when do you want to get it? What your financial goals are and how much risk you can stomach getting there are key to successful investing.
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