Diary of a Private Investor

Investment Strategies

One of the key challenges beyond individual stock selection lies around portfolio management and in particular, relative weightings for each holding. Partly to help my own thinking but also to track and manage performance, I categorise all of my holdings via three strategies:

Diversified Income
These are shares that I hold primarily for the yield with a view to reinvesting that income across the wider portfolio. These are mainly high yielding value plays with some growth at a reasonable price thrown in for balance. The aim is for this portion of the portfolio to provide a guaranteed income (currently for internal reinvestment) and a total return in the region of 10% per annum, roughly half via income and half via capital growth. The wide diversification in this strategy should provide stable, predictable returns with low overall volatility. Portfolio Constituents

Compound Growth
These holdings are the core of my portfolio and consist of growth shares that are already profitable and paying a dividend of typically 1-5%. Again, the income from these holdings is reinvested across the wider portfolio in order to compound the returns. I screen these stocks via mechanical criteria and then follow up with qualitative research. My bias is generally for high quality but sometimes expensive companies with growth business models and rising earnings. More recently, I have added positive momentum and for the time being, a good proportion of dollar earnings across the basket of stocks. My assessment is that each of these holdings has the potential to deliver 20% (or more) capital appreciation in addition to the yield. However, I also accept that from around a dozen holdings, some are bound not to work out as planned. But with a mix of mechanical and qualitative stock selection, the application of my stop-loss-decide rule and market conditions permitting, I aim to consistently come out on top overall. Portfolio Constituents

Special Situations
This final strategy is a little more obscure. Typically, these holdings are the spice of the portfolio whether that is pre-profit, pre-dividend or recovery plays. By definition, I regard these holdings as high risk and aim to weigh them accordingly in the overall portfolio balance. Portfolio Constituents

When viewing my overall portfolio, I try to ensure that I have a balance between strategies, weightings, business and geographic diversity, risk ratings and StockRank styles. My aim is to deliver consistent portfolio performance (minimum 10% absolute return per annum and outperform the FTSE All Share Index) with low maintenance and minimal trading while sleeping soundly each night. I am still pursuing the optimum portfolio balance and mix to achieve this aim – it is a fascinating, continuous challenge!

 

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