Often, it seems that building a portfolio is as much of an art as a science. That’s because predicting the future is inherently problematic, due to complexity and uncertainty. For example, I have no idea whether, say, the S&P 500 index will outperform high-quality bonds in 2024.
What’s more, having a high IQ and/or vast experience is no guarantee of success when choosing and managing financial assets. As my guru Warren Buffett has remarked, “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing”.
Value versus growth investing
What’s more, many investors tend to find themselves adopting one of two styles. Growth investors prefer to buy stocks in fast-growing businesses, often in the tech sector. Meanwhile, value/dividend/income investors prefer to part-own solid, established, and undervalued companies.
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I fall into the latter camp. Of 29 individual stocks in our family portfolio, I would describe only five as being outright growth stocks. The other 24 shares we own for their value qualities — or for dividend income.
Furthermore, within this pot of shareholdings, only seven are US stocks, with the remaining 22 being UK shares. In other words, this particular collection of assets is heavily weighted towards UK value. But is this right for me and my family?
S&P 500 versus FTSE 100
For me, easily the biggest problem with investing is what I’d describe as ‘calling the trends’.
For example, following the UK’s Brexit vote in mid-2016, I correctly forecast that the S&P 500 would beat the FTSE 100. From 1 July 2016, the Footsie has gained 12.5%, while the main US index has leapt by 101.6%. Correctly predicting this outcome has made my family much better off.
Likewise, over the past five years, the UK’s main market index is up 6.7%, while its American counterpart has jumped by 59.5%. Over one year, these gains are 6.2% and 15.9%, respectively. Therefore, surely this should be a no-brainer?
Shouldn’t I just put 100% of our wealth into US stocks and ride the wave of America’s corporate success? Alas, it’s not as simple as that, because pretty much all trends eventually end. In addition, all the above figures exclude cash dividends, which are far higher from London-listed companies.
Adding ballast and balance
Over four decades, I’ve come to understand what we need from our portfolio of assets. I’d prefer not to manage an asset base that shoots out the lights every so often, but is wildly volatile. Instead, I’d prefer a well-balanced pot, containing both growth and value shares and funds. This adds balance and ballast, thus reducing portfolio instability.
Now I’ll cut to the chase. Which would I buy today? The FTSE 100, offering an earnings yield of 9.2% and a dividend yield of 4% a year? Or the S&P 500, with figures of 4.8% and 1.6%, respectively?
Predictably, my answer is to sit on the fence. My current plan is to continue to add cheap FTSE 100 shares to our portfolio, simply as a value play. Meanwhile, our regular savings will continue to invest in US-heavy global trackers. For me, this offers the best of both worlds — value and growth!
