I forgot to publish and share but this made me chuckle from the Mcturra blog…. well if you don’t laugh you might cry.
Well obviously we want to build wealth, but it’s important to realize how even a little extra % gain each year can be significant. Making or losing an extra 1% may seem insignificant over a year, but over a period of several years it’s effect becomes very significant.
“Compound interest is the 4th wonder of the universe” quote sometimes attributed to Einstein.
The below table illustrates a £10,000 starting amount growing annually at 7, 8, 9 and 10 %. It also shows the final value difference between growing annualy at 7% compared to 8, 9 or 10%.
|Starting Capital||Annual Gain %||Capital after 15 Yrs||Difference compared to 7% after 15 Yrs||Capital after 20 Yrs||Difference compared to 7% after 20 Yrs|
£10,000 growing at 10% annually turned into £67,275 after 20 years, which is almost 73.9% higher that the £38,697 it would have become if grown at 7% annually.
If we continue for 25 years, for a portfolio growing an additional 3% per year, the final value after 25 years is almost double what is would have been!
This brief analysis doesn’t factor in regular contributions or the inherrent variability of annual performance – but does highlight the importance of making a few extra % every year across the whole portfolio (stop chasing those individual multibaggers that almost always dissappoint). Doing so makes a large difference to the future size of your pot of money.
Have i mentioned before that the average private under performs the wider market….? Imagine a typical investor who would have had triple the amount in capital after 25 years – if only they had matched the market (perhaps by buying a index tracking fund). They have missed out on a lovely compounded growth in capital. The truth is they may have given up long before faced with continued disappointing investing results.
Ok, so how do I go about harnessing the power of compound interest…? See my next blog post for an overview of how i would tell a friend or family member to invest, if they’ve already decided they want to invest in the stock market.
This post started as an introduction to the portfolios I’m planning to track on this blog from now until some far away point in the future thereby demonstrating my stock picking credentials 😉 But it seemed like a good idea to reflect on how I arrived at this point in my investing career.
I’ve been interested in the stock market and investing my own money since 2012. I enjoy the challenge of beating the market and the mental work required to assess potential investments. The macro environment is fascinating (and terrifying). The underlying aim has always been to build wealth to give myself greater freedom, security and to improve my life and also those around me.
Since beginning down this road in my late twenties, investing any disposable income I had, I’ve learn’t a great deal. It’s (hopefully) true that making mistakes earlier is cheaper than making mistakes later in your investment career when you might be managing larger amounts of money. I’ll know for sure in another 25 years whether i’ve had a cheap or expensive education!
Perhaps in another blog post I’ll talk about some of the painful lessons I’ve learnt along the journey:
- How anchoring your investment thesis to an idea or belief about the market/company can trip you up when that anchor magically dissolves.
- How you can be right (about a company) but still lose money.
- You can be wrong, lucky and over confident.
- How portfolio management is more important than individual stock selection.
- The market can be irrational. Combine this with shorting and you can potentially expose yourself to a lot of risk.
- Assuming others know more than I do. Assuming others know less than I do.
I am intelligent, numerate and curious but we all know these things don’t guarantee investing success. Human emotions and behaviour play an outsized role and luck plays her part. I’ve gained a large amount of knowledge since 2012 reading and exploring investing alongside my full time job. I’ve read in the evenings and weekends. Books, blog posts, videos, company results…. the occasional annual company report 🙂 I’ve googled a thousand questions from economic history to technical analysis terminology. I feel I have a solid grounding in the investing landscape and have sufficient experience to make me competent. I realise i haven’t been through a real bear market yet for all stocks but i have been invested in gold and oil through their prolonged bear markets. The reason I outline all this is because I am now at a point where i want to take a small step back from what has consumed a large part of my spare mental capacity and time since starting…..
I began it all began to help improve my lot in life. However, I have become more aware over the past few years that my time and mental energy are finite. I do not want to continue to spend these precious things essentially thinking about how to make money and increase wealth. These are worthy goals but I feel I have let them crowd out other arenas which are also important to which I’d like to give more time and energy.
- Are you distracted checking twitter or live prices on your phone when you could be engaged with your partner?
- Reading stock market RNS’s when you could be attending fully to your children?
- Nighttime wandering mind on recent market events when you should be winding down and relaxing?
- Maybe you don’t find time for music nowadays due to those finance podcasts?
- Never ending analysis, rational thought, mental arithmetic…. do you get time to just ‘feel’?
It’s not divorced from the addiction attraction us humans have with social media/electonic devices where we spend countless hours for no obvious benefit. In fact it is probably making us less happy.
So i’m taking a step back, but only a medium sized step…. I’m organising and diarising my investing activities into quarterly and annual reviews. I will spend my energy on investing during these diarised periods and reduce time spent on the markets otherwise. At the very least, my daily or weekly interest will be more casual and i will not be making portfolio changes or re-thinking strategy. It will be tricky as i enjoy the constant newsflow and excitement of the markets.
To support this aim I will be moving towards a Stockopedia Stock Ranks style portfolio with annual rebalancing. I believe this will not only save me time but also improve my returns. I intend to publish my annual returns along with my annual selections and picks on my blog. I also want to have some fun with a couple of ‘model portfolios’ which i’ll reveal and track on a future post.
Ps. If you are new to stockopedia and want to signup for a free trial, please use my referral link
I haven’t posted in a long time and have neglected to post a 2018 NAPS style model portfolio. I explained in my 2017 NAPSesque post that i was nervous about the market and wanted to stay partly in cash. The FTSE 350 actually ended the year c. 8% up whereas my portfolio which was 50% cash ended the year about 1% up! So ultimately ayear of lost potential gains.
The truth is that i continued to feel nervous at the start of 2018 and didn’t pick a 2018 NAPS portfolio….. but sitting here bearish indefinately is unsatisfactory….
2018 is showing a decline in the FTSE 350 so far. Perhaps a NAPS style portfolio would have outperformed. My wider market nervousness has led me to increase holdings of cash in my personal portfolio and to buy some put options on certain overpvied US stocks (Netflix, Tesla, Shopify, Snapchat) but what i really want to explore is the idea of a more systematic Stockopedia NAPS style long/short portfolio whereby we pair the highest ranking stocks in a portfolio with some short positions in the lowest ranking. Watch out for future blog posts on this…
So i wrote a post with my NAPs for 2017 but being short of time, and on the whole nervous about the markets i didnt post it. I then resolved to post my NAPS on the basis that i’d be notionally 50% invested, holding the other 50% as cash until a point in the year where i wanted to invest the remainder.
But i still haven’t posted. I just feel too nervous with Brexit, Trump, recession risk in the US etc etc. I know there are alwys things to be worried about and i have no long term experience – i just think i want to to sit out for a while. I’ve decided to remain ‘in cash’ for the foreseeable future. I may publish my NAPS at some point in the year – else if i dont, my performance should be judged as holding cash against the market.
|HAT||H & T|
Time for a brief review of my 2016 NAPS performance … overall a 17.8% gain. Not bad at all – not quite last years 24.2% gain but respectable nonetheless. Looking through the individual companies a stop loss at circa 20% would have saved me from Genel and Fairpoint big losses but on the other hand would have triggered for Empresaria which subsequently recovered.
Genel is one of the only oil stocks not to benefit from my correct call that oil wouldn’t stay at $33/barrel. Fairpoint reminded me of the danger in buying into a story. In truth the numbers didn’t match the story – i assumed they would catch up – ie i trusted management. That’s something i’ve learnt not to do without very good reason.
BooHoo had a barnstorming year and personally I sold out at around 80p. Unbelievably its continued onto 130p to my dismay – but the NAPS rule based process meant it was not sold and so contributed nicely to the 17.8% gain.
I’m slightly puzzled why Capital Drilling wasn’t included – it has been my top pick for over a year now and scores highly in the stock ranks. I’ll make sure to include it this year..
2017 NAPS to be published shortly…
Out of interest – if I had kept with my 2015 NAPS I’d have made a 13% loss! The 2016 Naps heatmap looks similar to at the start of the year -so it’ll be interesting to see how it does in a years time.