In a week when markets could be hyper-sensitive to what Donald Trump says with his inauguration speech on Friday, it got me thinking about what our investment strategy should be. I hate treating share investing like punting on the horses.
Let me be very honest here: I’m a very conservative ‘risky’ investor!
I know it sounds like a contradiction in terms but it’s not, given the changing world we live in where we’re living into our eighties. When I first looked into financial planning when someone retired, the more balanced investor was not a wealth-creator but a super conservative capital ‘preserver’.
These people wanted to preserve their capital so they went into term deposits or bonds. However, what they were generally doing was eating into their capital and effectively praying that they wouldn’t live too long and run out of cash!
Well, we’re living a long time and the experts say many more of us will be hitting 90 and then 100 like never before, so we can’t afford to close up shop on investing in shares in our sixties and even our seventies!
I am 100% exposed to stocks in my super fund — given a balance of cash for opportunities, and I didn’t care — too much — when the GFC-crash hit the market by 50%. My portfolio was better than the index and I still copped it. However, as I teach about the vicissitudes of the investing cycle, I was pretty relaxed about it.
When I saw CBA under $30 and stocks with a great history of playing dividends, I loaded up on them. As I am getting older, I was happy to swing my investment strategy towards companies that pay good dividends and their track record shows they do it repeatedly.
Let’s imagine you bought CBA at $30 in February 2009 because you believed what I was arguing then. Your dividend yield on that investment is $4.20 on $30, which is 14% before franking credits. And then there’s the capital gain to be acknowledged.
The current share price is $83 or so, and that means you’ve made 176% capital gain as well. Even if you’d followed my advice in early November this year, you could have bought CBA at $69 and on a $4.20 dividend, your yield would have been 6% before franking credits.
I know I could do better in individual years if I didn’t have a dividend and growth-biased strategy, with a higher priority on dividends. However, I like the fact that conservative stocks can also be nice capital gainers over the cycle, especially if you follow my ‘buy the dips’ strategy.
The history of stock markets says that over a 10-year period, the index will deliver around 10% per annum, despite two or three bad years. And half of that return is dividends. Given this, I like to swing my bias for stocks towards dividends, especially when they’re franked 100%. Sure, I could miss out on some capital gains from spectacular capital gain performers — often small- and mid-caps — but I just like the idea of investing in companies that consistently pay good dividends and in particular those businesses that grow their dividend.
How many stocks do I play with? Well, this is another aspect of my conservative risky investment strategy, because I hold around 20 stocks. My mate, Paul Rickard, teases me for holding so many, but I don’t like having too much exposure to any crazy government decision or out of control CEOs!
Now I’m not telling you that you have to copy me because your risk profile and goals could be very different to mine. And in reality, not many of my financial planning clients would be playing the same game as me, but as I say, my strategy links to my goals and appetite for risk.
For this year, my team and I will be on the lookout for companies that pass my dividend growth test, so watch this space.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.