I have previously written that I intend to keep stocks for 30-40 years, and I'm not going to sell the shares that I own. Over the last couple of months, I've started to change my mind on how I want to invest my money. I don't think there is anything wrong with my initial strategy, I just think there are more optimal approaches to take. For example, if I were to keep £2,000 invested in each company within my portfolio for 30-40 years, the chances are that I would accrue substantial dividend payments and benefit from huge capital growth. The long term (20+ years) 'buy and hold' approach is not only successful, but it also requires very little time to maintain your portfolio. Once you've researched a company and bought shares in it, you can just leave it to grow and pay dividends.
Why would I choose to sell Shares?
My current strategy is designed to outperform the one above. Most shares will go through times where they're undervalued and overvalued several times over and in this fluctuation lies opportunity. Take my recent purchase in Standard Chartered for example. I bought shares at 991p and their yield is currently over 5%. In 1-5 years time, the share price could increase to hit the previous high of 1940p (back in November 2010). As a result the yield could drop to 2.5%. At that point I would have nearly doubled my investment value and received dividends on the way. It's not all great news though, my portfolio would be slightly out of balance with more money invested in Banks, and a company that makes most of it's money outside of the UK. My New Strategy would allow me to either sell half of the shares and re-balance my portfolio to more normal level, or sell the entire holding. If I were to sell my entire holding I could buy two companies with the money. I would plan to purchase shares that I feel offer greater value than Standard Chartered - Companies that offer yields in excess of 4% and have scope to appreciate in share price. The process would then continue but this time I would have two companies instead of one. This would help spread the risk of the overall investment, and increase the chances for success.
To this end, I recently sold shares in Pearson PLC. I didn't double my money, but I made a £209.48 profit from the sale (after commission and charges). I reinvested this money into the purchases of IG Group Holdings and Morrisons (Wm)
. The short reason to why I took this action was because I felt that Pearson was slightly overvalued and the other two companies were slightly undervalued. I might very well buy shares in Pearson in the future if their share price is at a level that I would consider once again 'undervalued', but for now, I believe my money will benefit more from being in these two companies.
Total Income - 2014
When I add the profit made from this trade to the Dividend Income I've earned this year, my Total Income from stocks and shares for 2014 is £644.61. I normally buy shares in a company when I have around £1,200 capital. I'm really encouraged to see the Total Income is now over half of what I would use to invest with. I'm looking forward to the time when I can buy shares that I haven't had to work for. I predict that I'll be in position around May/June time next year.
As of 4th November, I've contributed £16,079.53 of my own money (excluding dividends and trading profits) into buying shares, funds and bonds in 2014. The £644.61 I've earned so far represents a 4% return on investment. The 4% is a low end figure because if I didn't invest anymore money for the next 6 months the dividends would keep coming in and my yield on cost would continue to grow. Some of my investments will take up to 6 months before I see any cash return.
I've decided to record the trade profit on my 'Dividend Income' page. I might change this if I end up trading more frequently, but for now it makes sense. I'm ultimately investing to earn money and I'm comfortable if that is made by dividends or trading. Dividends will be my bread and butter. They're more reliable and predictable (to me anyway!). I don't want to trade too frequently, and the foundation of my trades will be around putting my money in a place where it will work harder, NOT to make a quick buck!
What do you think about my change in approach? What are your thoughts on trading? Have you adopted a similar strategy? How has it worked for you?
Labels: Stock Trading