Review of the Year – I’ve Seen Worse

It’s that time of year when I review my overall share portfolio performance. My main objective is to outperform the FTSE All-Share every year using a balanced and diverse portfolio which I did manage to achieve again last year. But I showed an overall loss, including dividends, of minus 5.0%. The FTSE All-Share capital value index was down 12.6% on the year and taking into account dividends that suggests a total return of minus 8.3%.

When I say a balanced portfolio, there are few traditionally defensive stocks in there, and no index tracking funds. The emphasis is on small to mid-cap stocks with hardly any FTSE-100 shares.

The first half year was good, but the last few months of 2018 were particularly bad for many shares that were technology focused or had any pretense of aiming for growth. That’s not to say that there were not a few gainers, but with a large portfolio the numerous losers offset the few shares that rose. You might say that “growth” shares have gone ex-growth as investors put bigger discounts on a gloomier future in general.

Small cap stocks of all kinds were depressed – for example the share prices of two small cap investment trusts (Standard Life UK Smaller Companies and Blackrock Smaller Companies Trust) were down by 18.2% and 7.5%. They both have good long-term track records with well respected managers but an emphasis on UK stocks did not help.

Would it have helped to skew my portfolio to overseas markets? No. That was in fact done by purchasing a number of investment trust holdings but they were some of the worst holdings in the portfolio in the second half.

I did sell down a number of shares in the portfolio as I manage the exposure dynamically to follow overall trends. That means I am now over 20% in cash which is unusual for me as I tend to prefer to be fully invested in shares. But am I looking to rush back into the market? No simply because I am wary that UK share prices will not recover until the Brexit issue is settled and the US market, which we tend to follow, may not recover quickly either. I never act based on economic predictions anyway – I just follow the trends.

It might feel that we have been through a bear market of late but really it’s only been a relatively small correction to date, driven by investor confidence that has been undermined by political events and trade wars.

Looking back a minus 5% return might be considered disappointing but I had minus 17% in 2008, after which there was unbroken series of positive returns with a very good one in 2017. Most of the 2017 high fliers fell back to earth in 2018 though.

One question that investors should always ask themselves is “should I forget stock-picking of individual shares and just buy an index-tracking fund?”. That would save a lot of effort in researching individual companies and monitoring them. The answer is clear in my case. Looking at the last ten years I only underperformed the FTSE All-Share in one year and in some years was way ahead. So I would be a lot poorer if I just relied on an index-tracker.

I am not convinced that stock picking, particularly among small to medium cap shares by someone with a little experience, cannot produce positive returns. In other words, it is not a perfect market in reality. No doubt there are also some investors who have done better than me with more focused portfolios but all I know is that diversity does protect against disasters that are unfortunately all too common in the investment world.

Two things I should probably have paid more attention to were a) running a trailing stop-loss (one that is adjusted to take account of share price rises; and b) being more aggressive in dumping my losers. The latter is something I consistently fail to do but some small cap stocks are very illiquid so getting out of a biggish holding at a reasonable price when the spreads widen can be both difficult and expensive.

Were there any major disasters in my portfolio this year? There are frequently one or two in every year. This year the only big one was Patisserie but only relatively so as it was not one of my bigger holdings. I avoided most of the really big crashes in “hot” shares such as Fevertree by avoiding buying them at their peaks.

Overall a disappointing year so like most stock market investors are probably feeling, “I must try harder”. But don’t we say that to ourselves every year?

As a born optimist, and with buoyant economies in the UK and USA, I am looking forward to the future with some confidence as ever.

Roger Lawson (Twitter: )

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