Portfolio review: 100% return over 6 years (high yield, low risk)

Here’s a quick update on my high-yield, low-risk portfolio, which has now doubled in value over the last six years.

Hopefully, this review will give you some ideas about how you can perform your own portfolio review, which is a critical part of being a good investor.

The first thing is to review your investment goals.

My goals for this portfolio are:

• High growth: Produce higher total returns than the FTSE All-Share over five years or more
• High yield: Have a higher dividend yield than the FTSE All-Share at all times
• Low risk: Be less volatile than the FTSE All-Share
• Low effort: Only make one buy/sell decision each month

One final long-term goal is that I would like the portfolio to reach one million pounds within 20 to 30 years, from a starting value of £50,000 (requiring an annualised growth rate of 10% to 15%).

Okay, so that’s what I’m aiming at; let’s see how the portfolio’s done:

High growth? Yes, helped by a rising market

My preferred route to tracking performance is to set up virtual portfolios.

I do this with ShareScope, but a spreadsheet can also do the job (have a look at my Portfolio Analysis Spreadsheet on this page for an example of how a spreadsheet can automatically update share prices).

I have one virtual portfolio that matches my real-world portfolio (but without all the cash in- and out-flows that complicate matters) and another that tracks the market index.

Following this approach, my model portfolio has comfortably achieved its first goal of beating the market over periods of five years or more:

Here are the same results in more detail:

You can calculate annualised returns using the XIRR (internal rate of return) function in Excel. Other spreadsheet systems usually have something similar and there are online IRR calculators as well.

Generally, I’m happy if the portfolio is beating the market index and producing double-digit annual returns, so of course I’m pleased with its five-year annualised return of 13.1% per year.

However, this very good result has been helped by a market (i.e. the FTSE All-Share) which has produced annualised returns of 9.5% per year over those same five years.

That’s well above average, so it’s likely that both the market and the model portfolio will generate lower returns in future. But if the portfolio stays 3% or so ahead of the market each year (on average) then I’ll be happy.

So growth is on target, but what about the dividend yield?

High yield? Yes, by a fairly consistent margin

As well as beating the market in terms of growth, the portfolio has also managed to generate more income every year since 2012 (which was its first full year of dividend payments).

Here are those annual dividend payments so far:

As well as generating more dividends in absolute terms, the portfolio has also had a consistently higher dividend yield:

Other than a slight blip in 2015 (when the index tracker’s yield jumped up because of a change to its dividend payment date policy) the model portfolio has always had a yield almost 1% higher, so its high yield goal has obviously been achieved.

If you use a virtual portfolio then tracking dividends is fairly easy. Just check your real-world portfolio at the end of each month and add any new dividends to your spreadsheet (or if you use ShareScope this is done automatically).

So that’s growth and income, what about risk?

Low risk? Yes, regardless of how you measure risk

I have learned from bitter experience that I don’t like my portfolio to be volatile, and I think that’s true of many investors.

So what I want is more income and more growth than the market but with less risk.

My preferred measure of risk is to look at how much a portfolio has declined in value from its previous peak at various points in the past.

For example, if the market repeatedly declines by 20% from its peak value and my portfolio never declines by more than 10%, then I think it’s fair to say that over that period my portfolio was less risky.

That sounds sensible enough to me, so here are the peak-to-trough results for the model portfolio and its All-Share benchmark:

Again, this is easy to calculate if you use Excel’s MAX function (or equivalent) to keep track of a portfolio’s maximum value to date.

As you can see from the chart, the All-Share tracker declined by more than 10% in 2011 and again in 2016/2016, while the model portfolio did not.

In fact, in the 2015/2016 mini-slump, the model portfolio fell by no more than 4%, which I doubt would stress even the most cautious of equity investors.

That at least gives me some confidence that the model portfolio will hold up well in the next bear market.

Better risk-adjusted returns? Yes, by a country mile

Since the portfolio has produced higher returns than the market and has suffered smaller declines, it should also have higher risk-adjusted returns.

One measure of risk-adjusted returns is the Sharpe Ratio, which is used by FE Trustnet and others to measure fund performance.

There are various ways to calculate the Sharpe ratio so I’ve used the FE Trustnet approach, which is to calculate it as the ratio between:

1. Return: The average “excess return” generated beyond the risk-free rate, which FE Trustnet assumes to be 3.5% per year
2. Risk: The portfolio’s standard deviation, which is a measure of volatility.

My spreadsheet tells me that the FTSE All-Share tracker generated average annual returns some 6.1% above the risk-free since the start of 2012.

As you might expect, this is slightly less than the model portfolio, which produced average annual excess returns of 8.5%.

On the risk side of things, the All-Share had a standard deviation of 9.7% compared to the model portfolio’s 6.9%, so the model portfolio has been less risky whilst producing higher returns.

Those numbers give a Sharpe ratio of 0.63 for the All-Share and 1.24 for the model portfolio.

This means the model portfolio has returned 1.24% of excess returns (above the risk-free 3.5%) for each percentage point of volatility compared to 0.63% for the All-Share. In other words, about twice as much.

Here’s a snippet of my spreadsheet showing the same calculations using data from 2015 onward (which produces slightly different results than those above because it covers a different period, but the model portfolio still comes out way ahead):

Okay so returns are high, the yield is high and risk is low. But how much effort has this all taken?

Low effort? Yes, just three trades since the last quarterly update

I have neither the time nor the inclination to sit staring at a Bloomberg terminal all day. Instead, I want to be able to get decent returns from the stock market with just a few hours of effort each month.

That’s partly why I lock myself into a fixed schedule of buying or selling just one company each month.

One monthly trade gives me plenty of opportunities to continually improve the portfolio, but it also forces me to mostly do nothing with the portfolio, and doing nothing is quite often the best thing you can do.

Since the last portfolio review in July, I’ve made just three trades:

• In August I bought another restaurant business
• In September I sold Braemar Shipping
• In October I bought a bank for the first time since selling Standard Chartered

The idea is that these regular but infrequent changes to the portfolio will be enough to constantly nudge it towards better companies at lower prices.

That should, in theory, help to keep the growth rate and dividend yield up, and the risks down.

So as an investor, I would say you should expect to spend at least 90% of your time doing nothing with your portfolio. And while that may sound boring, it does mean you’ll have more time to do other things.