The Guide to Investing in Stocks and Shares

2008/2009 Review

Dan Tebbutt - A Shareworld Contributor

I've been investing for 2 years now, and I thought it was about time to take a step back and see if it's actually been worth all the time and effort I've put in. There are plenty of low-cost, low-effort ways of investing – just putting your cash in a FTSE tracker for instance. Would I have been better off taking the easy way out?

I'm going to compare my portfolio to the FTSE100. It's not a totally valid comparison – my portfolio includes foreign shares, bonds and small-caps – but data on the FTSE100 is easy to come by, and FTSE100 trackers are the cheapest way for a UK investor to get exposure to the stock market.

First of all lets look at the gain in capital value over the two years. My portfolio has grown at a rate of 15.5% per year (based on the average amount of money I had invested over the 2 year period).

What if we replace every buy and sell I made over the last year with an equivalent buy or sell of the FTSE100? The annual return over the 2 years using this method is 13.1%. So my choice of shares has improved my returns by 2.4% per year. Not bad.

The choice of what to invest in isn't the whole story though. The timing of buys and sells is also important. So what if I'd smoothed out all my investments over the last 2 years, investing a fixed amount of money in a FTSE tracker every working day? In that case my annual gain would have been only 11.5%. So my timing of when to buy and sell improved my returns by a further 1.6% per year.

Have my superior gains been due to choosing low-dividend shares? My returns due to dividends have averaged 3.9% over the 2 years. If I'd invested in a FTSE100 tracker I would have earned 3.8% with my own buy/sell timings, and 3.7% with a regular daily investment. Not a big difference, but my dividends are more than keeping pace with the average for the FTSE100.

Perhaps my excess returns have been due to choosing more volatile investments – small-cap shares like Zirax, Maxima and Carpathian, and risky large-caps like RBS and Taylor Wimpey. Performing a genuine analysis of volatility is slightly beyond my powers, but for a simple comparison I've worked out the standard deviation of the daily change in value of my own portfolio vs the FTSE100. My portfolio's daily change has a standard deviation of 1.8%. The equivalent for the FTSE100 is 2.0% - so my own portfolio is slightly less volatile (whether it is less “risky” is not subject to quantitative analysis, but I believe it is).

Much as I'd like to congratulate myself on being smarter than the average investor, I know that you can't draw any valid conclusions from 2 years of data. If we look at the equivalent numbers from 2008 alone, they paint a very different picture – my annualized percentage capital loss was 72%* vs 29% and 31% for my two FTSE comparisons. Definitely a year to forget!

While 2 years is too short a period of a time to draw any conclusions, I think it's worth getting into the habit of doing this sort of analysis. Now I have the spreadsheet set up, it should only require a few minutes to update the numbers – I plan to do this every January from now on. If I'm still outperforming after 10 years then perhaps that will be worth a modest celebration.

* This might seem implausibly high, but remember this is my total loss for the year divided by the average I had invested for the year – and I started the year with nothing, so the average amount I had invested over the year was about half of the amount I had at the end. Most of my losses occurred towards the end of the year (in October, after Lehman Brothers collapsed), magnifying their effect on my annual return. Using this method it's actually possible to report an annual loss of more than 100%.