Many people think they will do well out of trading shares regularly over time. But hardly anyone does. For the majority of private investors, the biggest rewards of both income and capital will likely come from a strategy of 'long-term hold', says Stephen Bland.
I recently read a fascinating interview with Jim Cullen, an American fund manager with a lifetime of experience in the business. And I think you'll be interested in what he has to say.
According to Cullen, if you had $1,000 in the S&P 500 in 1957 with dividends reinvested it would have turned into $149,598 by 2009. The same investment in the 20 per cent of S&P stocks with the lowest yield would have turned into $60,586. But an identical investment into the top 20 per cent, by yield, would have become $577,587.
Those differences are simply enormous. But they came as no surprise to me. I've been advocating a strategy based on investing in high-yield blue chips for decades.
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I call it "strategic ignorance". I choose to pay no attention to fluctuations in shares. My policy is simply to buy real purpose, high-yield stocks and to sit on them forever. Why?
How the High Yield strategy works
Investing in a number of such shares has been shown many times to be a winning strategy over the long term simply because on balance, these shares are frequently unreasonably cheap.
You buy the top high-yielding stocks - building a diversified portfolio across all sectors. And you simply sit back and allow the dividends to pile up.
In the short term, the strategy may not necessarily work. It's true to say that not every single high-yield share will do better than every lower-yield. You just have to look at the experience of BP and RBS to see that. But as Jim Cullen demonstrates, over the long term this strategy will outperform all else.
Time and time again in my capacity as an accountant, I found clients who had managed to outperform almost all investors I knew by the simple expediency of forgetting about their portfolio. So why doesn't everyone do this?
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The insane cult of share chasing
But the truth is that hardly anyone ever does well out of trading shares regularly over time - though too many think they will. For the majority of private investors who lack any kind of real skill, the biggest rewards of both income and capital will likely come from long-term hold.
It can be a difficult message to get across. Doing nothing? "Nothing doing!" is often the response from doubtful investors who think they know better. And it's definitely not sexy merely to sit on shares for many years. But the evidence is hugely against them.
Your capital is at risk when you invest in shares - you can lose you some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. There is no guarantee that dividends will be paid. The Dividend Letter is issued by MoneyWeek Ltd. Customer services: 020 7633 3609.
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