Will I reach my portfolio goals with current investment strategy?

 I have been pondering if my current investment method will achieve the 1 million euro portfolio goal and 55 thousand euro annual dividend. It is a big portfolio and it does depend on inflation and many other factors between heaven and earth. In order to better understand the requirements I made a few scenarios to display my thoughts and options. 

Have divided into two main options based on savings needed per month. Note that there are many moving factors impacting how much I can save and invest as well the market value of my portfolio might swing up and down in the future.

Option 1 Saving 250€ per month with 5,39% return

First option would be to save and invest 250€ per month which will be increased by 2% on an annual basis and have a dividend yield of 5,39% net of tax to be reinvested. This would yield a 1 million euro portfolio without any price appreciation (stock value increases). Important to remember that the portfolio does not start from zero at this moment, a over 50 thousand euro portfolio is fairly good yet nothing to brag about. I would have to save 232 444 euros of my own money over 40 years to get to 1 million, it does sound like a small amount compared to many other options out there. The reason for the quick growth comes from compounding, interest on interest growing at an exponential speed.

The graph below displays the above-mentioned case, the orange line displays dividend received per year (right y-axis) which will be reinvested into the portfolio and the blue staples show the year end value of my portfolio (left y-axis).

You can see that the dividends based on this model does not fulfil the goal as the calculations does not expect a full dividend for investments done during the year. For the investments done during the year only a quarter is expected to get the full annual dividend while the rest will then be received the year after.

This is one option to get to the goal and saving 250 euro per month which increases 2% per year should not be difficult under current circumstances. If I get fired or would end up unemployed for a long time, then the goal might be delayed by a few years. There are other risks that may delay it, sickness or any other that can impact my ability to work and earn. 

Option 2 Saving 200€ per month with 5,76% return

The second option I set up is a monthly saving of 200 euros that will increase by 2% on an annual basis. Here a requirement would be a yield of 5,766% per year, compared to 5,39% with monthly saving of 250 euros. We see that there is a very small difference between the return required between these two options and it all falls down to the 50 euro monthly difference. In this case I would only have to save 194 878€ of my own money to achieve a 1 million euro portfolio. By now you should understand that the difference is coming from the yield of my portfolio, if the yield drops then time to achieve my goal will be pushed further into the future unless I would save more. 

A yield of 5,76% per year is difficult, even though Warren Buffett, Peter Lynch, Charlie Munger, Joel Greenblatt and many more known investors have returned much more on an annual basis. As the future is unknown the returns are to a large extent unknown, businesses operating environment might change to which they need to adapt or wither away. 

The importance of yield and compounded interest

To give a little more perspective with lower expected returns I have made a similar graph with a monthly saving of 450 euros which would require a yield of 4,04% per year. The lower yield requirement might be expected under current market value, yield returns decrease as values increase.

With a monthly saving of 450€ and annual return of 4,04% I would need to invest 382 708€ of my own money, significantly more than in the two other options. As we see the yield is much lower, maybe not that much if we think about it, but over a period of 40 year it has a huge impact on portfolio returns and how fast it achieves a 1 million euro value. The graph below shows the 450€ monthly saving and 4,4% yield development.

 

Goal of million euro portfolio summary

These examples as you can see are all showing a smooth positive development every year. In reality we will see years of positive development as well as negative developments. Just recall March 2020 when the markets dipped and many thought the world will end, look at markets now, who would have thought values would be this high over a year ago. I expected a slower market recovery then we have seen, as we can conclude I was wrong on the recovery part. 

The goal I have set of a 1 million euro portfolio by 2061 is not impossible, but will require patience and focusing on continuing the same investment pattern as before. The compounding effect will be handled on my behalf and maybe the portfolio market value reaches the goal many years in advance, we shall see. 

To quickly explain why 1 million, it is more of a symbolic number to me and nothing more. Once I have reached it I will most likely continue investing as before, hopefully will be able to affect how companies work and make decisions on strategic levels as well as how companies form their culture and who they employ. This in order to increase the company value through increased dividends and market value in the long -run. Please note that in the end it is the employees who are the company, and they create the value for owners, hardly the other way around.

Portfolio update December 2020

During December portfolio value did move a bit, portfolio value at year end was 40,118.03 USD or 38,984.33€. Received dividends of 121,12€net of withholding tax, biggest contributor was Telia with a additional dividend. Over 50% of December dividend was from Telia. 

Biggest losers in my portfolio is Colony Capital, Kraft Heinz and Bayer AG. Bayer with a so far failed Monsanto acquisition costing shareholders a lot in legal claim and Kraft Heinz with operational issues. Colony Capital is a bit of a different story as the company has some difficulties yet have so far managed to handle many cash flow challenges well, this however has not removed the full risk (as with all companies there is a risk).

Portfolio Changes

I increased my positions in AT&T, Telia Company, Peoples United Financial, Canadian Utilities and BCE. Increased positions in these companies mainly to reduce the average acquisition price (also called ”dollar cost averaging”) as well as trying to use the market momentum when they are moderately priced. BCE as you will see was acquired at a higher price than before, this is due to my belief that usage of data and mobile phones will continue the current trend of being dominant (I do not expect the market to grow as it has over the last 10 years).

Canadian Utilities was increased as the price has decreased even though demand for energy will most likely increase in the future. The company is stable, balance sheet is good, financial statement solid and cash flow good. Bought 3 shares in Canadian Utilities at a price of 31,57 CAD/ share, the weighted average purchase price decreased a bit yet not significantly. Most of the business earning comes from regulated business, making it a stable way to earn yearly returns. There is obviously the risk of sudden regulation which might harm the business however, do not see it as likely in the future.

AT&T bought Warner Media a time ago, they have some additional debt yet based on cash flow there should not be any issues unless the basic business starts to choke. Note that AT&T stopped purchasing their own shares to secure dividends. Increased the position from 75 shares to 80 shares at a average price of 28,89 USD/ share, the weighted average paid price per share dropped by 0,18 USD to 31,60 USD/ share.

Telia Company was again increased as I still see the company as a stable cash generating business. Their dividend is based on cash flow and not on earnings as many companies, therefore id the cash flow from operations is weak then dividend will decrease and vice versa. 19 shares were bought since last update in beginning of December, the average purchasing price per share was 3,43€/ share dropping the weighted average price per share to 3,79€ from 3,80€.

BCE 2 shares was bought at 55,42 CAD/ share increasing the weighted average price paid per share from 54,63 CAD to 54,71 CAD/ share.

People's United Financial was increased by 3 shares at a price of 13,00 USD/ share, decreasing the average paid price by 0,03 USD to 13,80 USD a share. 

Dividends

In December I received 142,39€ in gross dividends, net 121,12€. Biggest contributor was Telia with an additional dividend. Without Telia 3M Company would have been the single biggest contributor.

 

 Portfolio and Market in General

Have mainly increased positions in boring companies, not sexy tech or super ESG highlighted companies. Had for a short time iShares Global Clean Energy in 2020 yet sold that position when the underlying values in the ETF rose to too high levels for me. As I cannot with full certainty evaluate ”clean energy technology” I stick to moderately valued companies and sell them once their value is far beyond what is reasonable. As this creates opportunities in other places, like the boring companies and industries. If any of these industries or companies, see their value decrease to old moderate levels then I will most likely enter with a modest investment.

I shared the Shiller P/E ratio which is at really high level. This level can temporarily be sustained, yet not forever. Reason why not forever is due to investors demanding a return on their capital and companies with negative return on capital cannot demand capital from owners and lenders forever. This is one major variable that worries me, are people knowingly ready to finance non-profitable companies forever or is it mainly the greed of belief that someone else will pay more for it 10 years from now. 

My opinion is that some companies are overvalued while others not so sexy are under- to moderately valued under current market conditions. This creates opportunities to buy good or great companies at reasonable prices while via ETFs ride the general opinion of highly valued companies. 

I am considering buying a few shares in iShares S&P 500 ETF once the value has come down a bit as I would not feel comfortable getting into the index at these values. 

I also like to look at companies and markets we have temporarily forgotten for one or another reason. Here value can be found and once the public returns the positions can be sold at a profit. 

Hope for a good 2021 investment year with good dividends and maybe some small capital gains.

My Top 10 Investment Books

 I have made a list of 10 investment books I recommend to read before starting to pick individual stocks and why not before investing in actively managed funds. For index fund investors, just do not stop investing when the market falls as historically the market has recovered (at least the recovery from Corona was very fast).

1. The Intelligent Investor by Benjamin Graham

Summary of what you need to be aware of when investing your money in stocks, funds or any other financial asset. The book is a easy to read version of Security Analysis (investor bible), however it contains a lot of information i.e. how to look at company per-share earnings and the importance of reading footnotes. Advice on stock picking, bonds and funds are indirectly given as well as information on the market and its history which is very useful. If you want to index or pick individual stock, bonds or funds this is a must read.

2. One Up On Wall Street by Peter Lynch

If you want some information about how to pick stocks this is a good book to begin with. Peter Lynch summarizes his investment success in this book as well as how the market has behaved during his years on Wall Street. The book is easy to read and gives you the fundamentals of how Peter Lynch made it and beat the market. Much of this book focuses indirectly on the psychological part of investing as you will face different scenarios where the stock has gone down or up and should you buy now, buy more, sell the stock, wait and sell later or hold it till you are at breakeven?

3. The Little Book On Common Sense Investing by John C. Bogle

John Bogle (1929-2019) founder of Vanguard writes about his views on saving for a better future and retirement. Bogles views have been to mainly focus on indexing as you hardly can beat the market many years in a row, pointing out the high management fees some funds take yet not being able to beat the market, eventually the price you pay is very high in the long run. A good book fore every beginner to understand that there is nothing wrong with indexing and taking the return of stock markets at a low cost. It is better to be "average" then to lose your money trying to time the market. 

4. The Little Book That Beats The Market by Joel Greenblatt

Joel Greenblatt, partner at Gotham Funds, tells his story of how he spotted a way to invest with limited risk and still gain huge returns over the long run (Magic Formula). Here you have to note that his way of investing can be very volatile and should only be implemented by people with a strong stomach. The book is a really good read for the rest of us and something to value as his advice might come in handy from time to time.

5. Security Analysis by Benjamin Graham & David Dodd

The "Investors bible" in my opinion and a must read for anyone who wants to pick individual stocks, bonds or funds. This book is for individuals who want to analyse companies, bonds and other investment instruments. Over 700 pages of information how to look at different situations, values assets and businesses. 

6. Margin of Safety by Seth Klarman

In Margin of Safety Seth Klarman summarizes his perspectives on investing, mentioning that a company with different businesses where one is using a lot of cash while the other is generating a lot of royalty income can be a good investment. The book reminds a bit of Security Analysis yet is not as detailed in analyzing a business. In summary could say that the book point out psychology and analysis as important values a investor needs to be successful.

7. The Devil's Financial Dictionary by Jason Zweig

Jason Zweig explains in a funny way what different words and expressions means from investment world perspective. The book is entertaining in every way as well as educating to be more sceptical of what you are told and what explanations are used in different market situations. If you want to have a bit of fun you should read this book, one of my favourite explanations relates to Basis Points:

"Our management fee is only 50 basis points, said Phil D. Hopper, a portfolio manager at the investment firm Tucker, Cash & Left in Grosse Point, Michigan. "That's a bargain for the services we provide." Asked why the license plate on his Maserati in the firm's parking lot read "50 BPS,"  Mr. Hopper cleared his throat and replied, "That stands for 50 bauds per second, the spead of my first modem."

8. Warren Buffett's Ground Rules by Jeremy Miller

If you want to read a short summary of Warren Buffet's letters to shareholders, this is a must read. Jeremy Miller summarizes in a successful way Mr Buffet's letters as well as ground rules of Buffet's successful investing. It jumps from topics like taxation to indexing and emotions when investing in stocks. 

9. Behavioral Finance and Wealth Management by Michael M. Pompian

"People in standard finance are rational. People in behavioral finance are normal" Meir Statman, is a good start to introduce Michael Pompians book. it focuses on behavioral perspectives of managing your money and describes everyday issues we might confront with in normal mathematics. It is fun to read the book and mostly does not even feel like you are reading a book on investing, instead it is like jokes and point to note when making decisions. Practical examples are given and also ways of maybe challenge your asset manager to see if they really are working for you or for their own bonus.

10. Financial Shenanigans by Howard M. Shilit and Jeremy Perler

For those who want to find accounting frauds and discrepancy in companies filings this is the book. Examples on how companies report earnings, revenue and balance sheet adjustments which might indicate fraud or creative accounting will be given in this book. Well equipped with many real life examples of companies who committed fraud or were fined for their reporting method are given. This book complements Security Analysis for those who are willing to invest in individual companies. I really enjoyed this book and go back to it from time to time to remind me of what pitfalls there are.

Should you read all of the books?

Depends, if you want to invest in individual stocks then definitely YES. You learn a lot from them and will be equipped with ability to analyse a company, have the stomach to resist temptation and be able to spot value at a good price. Note that someone might say that a company like Tesla would have passed by based on these books, however if you are invested in an index then you will eventually have a small investment in the company at the end. And as Buffet as said "you don't have to swing at every pitch". 

There are a lot of other investment books which are really good and could recommend. The books covered in this post have learned me lot (in addition to accounting and tax courser as well as working with accounting) and strongly recommed younger me to read before investing in individual stocks.

If I would be forced to choose only two books it would be The Intelligent Investor and Margin of Safety.