Data-driven investing

You have an investment strategy of some sort. But is it succeeding — and how do you know? Even if you’ve already been investing for some years, the information you need will still be available.

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Next year, I turn 70.

Not entirely coincidentally, this year has seen something of a focus on fitness.

I bought a Fitbit, and started tracking and targeting my daily step counts. Fairly regularly, I do a particular coastal walk a few minutes’ drive away, timing myself over a specific route. And recently, I’ve joined an informal running group, timing myself over a 5K distance.

Central to all these activities — well, apart from doing them in the first place — has been a process of data collection and analytics.

Fitbit makes it easy: you can download your personal statistics in spreadsheet format, which makes charting your progress very straightforward. My regular walks have become faster, and easier. They may yet turn into runs. And looking at the 5K data, progress is discernible.

It’s what I do. It’s how I think. And it’s how I approach targeted improvements in other areas — such as our household’s electricity consumption, for instance.

Data driven

You won’t be surprised to learn that I take the same data-driven approach to investing. Indeed, readers with long memories will perhaps remember me mentioning spreadsheets and charts in previous columns.

And it’s an approach I’ve seen taken by other investors, too — some with multi-decade investing experience behind them.

What do they track? What do I track? Whatever we want, in short. Whatever suits our own investment circumstances and strategies, in other words. That’s the beauty of a spreadsheet-driven approach, as opposed to a tool such as Microsoft Money, or one of the proprietary portfolio-tracking tools that are out there.

Nor is the use of the word ‘strategies’ in the paragraph above without significance. I firmly believe that investing should be strategy-directed, and have some of goal in mind. In which case, it is only rational to measure progress towards achieving that goal.

Data that I capture

It’s no secret that these days I’m an income investor. And so, since 2005, my primary spreadsheet has been income-focused, measuring my progress in building up an investment income from a portfolio of individual shares.

The first ‘tab’ in the spreadsheet records progress within a given year: total new cash added, total dividends received, net share purchases, cash at year-end, and some columns of totals designed to inform a number of yield calculations: equity valuation, total new cash, and total bought cost.

Fairly obviously, then, I’m capturing yield as a percentage of equity valuation, yield as a percentage of new cash invested, and yield as a percentage of bought cost. Another column — and probably the least important one — captures profit against the year-end valuation. Finally, a column captures noteworthy comments of the year in question, and I also capture total annual dividend payments by company.

And, as I say, I have all that data and analysis going back to 2005.

A further tab displays and charts the timetabled payments of dividends throughout the year, to aid in planning. Another tab tracks a detailed sectoral breakdown, to aid in maintaining diversification and balance. A further tab records the total portfolio. And a final tab records every transaction, so that I could — if I wished — run a pivot table against it. So far, I’ve never wished to, it has to be said.

Steady as you go

So how am I doing, in terms of investment performance?

Thanks to the spreadsheet, I know. Objectively, not subjectively. Factually, and with real clarity.

Dividend income has increased, year on year. Yield on bought cost is satisfactory. Yield as a percentage of equity valuation fluctuates as capital values fluctuate, but is also satisfactory. And capital values have fluctuated — but then, global financial crises, pandemics, and unexpected national referendum outcomes tend to have that effect.

In other words, steady as you go. I have an investment strategy, and my spreadsheet tells me that it’s working reasonably well.

Other spreadsheets track other aspects of my retirement income planning. Overall, I’m holding the planned course.

Equities still win out

But should you even bother? Granted, retail investors are waking up to these opportunities. But from what I’ve read, it’s wealthier, more sophisticated investors, often with prior bond market experience.

Better by far, I think, is to stick with equities. Plenty of UK blue-chips yield more than bonds and gilts, and also offer capital upside.

Last time I looked, the FTSE 100 was trading on a price-to-earnings (P/E) ratio of 13, and the FTSE All-Share a P/E of 14. America’s S&P 500? 20. The broader Russell 2000? 25.

I know where I see the greater prospect of an upwards re-rating.

Why not?

Perhaps you already have such a spreadsheet, designed to suit your own particular needs. I know lots of investors do.

But perhaps you don’t already have a such a spreadsheet — and I know lots of investors don’t.

“It’s too late,” I hear you say. “I started investing several years ago. I’m not sure that I’ve kept all the paperwork.”

No matter: every investing platform that I know of keeps records of investors’ trades — even if they’ve since moved their investments elsewhere. The information is out there, and you can access it, and build your spreadsheet, just as if you’d maintained it right from the start of your investing journey.

Don’t have Microsoft Office? There are alternatives, such as Libre Office. And even a free, online version of Microsoft Excel, maintained by Microsoft.

If the will is there, the means are there. What have you got to lose?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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