How to Turbocharge Your Portfolio Profits

The return that you make from investing in the stock market can be eaten away by the costs involved and over time the cumulative impact can be considerable. So although some cost is unavoidable, you really must make sure that this is kept to a minimum.

The cost of managing your own portfolio will depend upon various factors, but principally the type of stock-broking service that you use, the number of times that you buy or sell shares each year, the average size of each of your shareholdings, and the overall value of your portfolio. Let's have a look at these in turn:

1) Your Stock-Broking Service

The internet has transformed the business of portfolio management for private individuals, making it dramatically cheaper and easier. If you are still giving your trading instructions over the telephone, there is really no excuse for not opening an on-line account. Aside from the fact that you can log on to your account wherever you are in the world - I have placed trades in UK shares from Australia as easily as from home - the dealing charge is usually radically different. Selftrade is one provider that charges a flat £12.50 for all trades, whether instructed on-line or via the telephone. But more typical is Shareview, which charges a flat £15 commission for an on-line trade but a standard rate of 1% (with a £25 minimum) for a trade instructed via the telephone. On a deal size of £10,000 this makes a difference of £85.

On-line share trading is a competitive business, so although charging structures do vary you can be sure that they will remain low. Some charges apply only under certain circumstances. For example there can be charges for inactivity (if you do not trade any of the shares in your portfolio); there can be charges for transferring shares into or out of your portfolio; there can be charges for electronic transfers of cash and for copies of tax certificates or valuations; and there are penalties for late settlement. With specialist accounts such as ISAs or SIPPS there are also usually annual administration charges which can be anything from £25 to £250 per annum depending on who you use and the size of your portfolio.

But for a basic account that allows you to trade, on line, in UK shares you should not have to pay any more than the dealing costs on each trade.

2) Your Level of Activity

Clearly the more you trade you the more you will pay. Each time you buy a share you must pay the broker's dealing commission and a 0.5% 'stamp duty' levied by the Government. There is also a flat 'PTM' levy of £1 on purchases worth over £10,000. When you sell shares you only pay the broker's commission. Although Hoodless Brennan and Barclays Stockbrokers offer discounts for frequent trading that can take the commission below £7 per trade, the standard rate is about £12.

Now it is absolutely crucial to understand that this is a flat rate, regardless of the size of your trade. If you buy £240 worth of shares, it equates to a commission rate of 5%, But if you are buying £6,000 worth of shares it amounts to only 0.2%. I am often asked what is the sensible minimum size for a share trade, and this flat rate commission structure is really crucial to the answer. The bigger your trades the less of your profit is eaten away by commission. So I would avoid any deals below £500, at which level a £12 fee costs you 2.4% of the trade value.

Size of trade matters and so, obviously, does the number that you place. The turnover of the Red Hot portfolio, which is really a theoretical construction, is higher than you should aim for with your own portfolio. You should try to keep your portfolio turnover below 50% per year. In other words you should not sell, and replace, more than half of the shares in your portfolio in any year, on average. I would try to keep it to one-third, meaning that your average holding period for each share is three years. This gives them a decent chance to perform - and you will find that the shares that give you the best return tend to be those that you have held for longest.

3) The Size of Your Portfolio

You need to strike the right balance between the number of shares in your portfolio and the average holding size. If your total portfolio is worth £2,000 then you should not hold ten shares of average size £200 - because as I said above the dealing charges would wreck your overall return. On the other hand if your portfolio is worth £200,000 you can hold happily hold forty shares of average size £5,000 knowing that the dealing charges on shareholdings of that size are immaterial.

You must work out for yourself what is a sensible number of shares to hold. The more you have the less risk is attached to any one stock - on the other hand you also dilute the impact of those shares that do well. On the whole I believe that most private shareholders hold too many different shares rather than too few. I would aim to have at least ten, but not more than thirty shares in your portfolio, depending upon its total value.

It is very important to understand that as your portfolio gets larger the costs of looking after it will fall. This is because most charges, including dealing commissions, are fixed. So if you are starting out with a small portfolio, and think that the costs are prohibitive then don't give up. As you save more and the value of your shares rises, your portfolio will get larger, and those fixed costs will become less material.

4) Some Examples

To show how this all pans out in practice, here are three theoretical examples, based on total portfolios valued at £5,000, £25,000 and £100,000. Each table shows the total annual dealing costs (including stamp duty), based on an assumed number of individual shareholdings and annual turnover. So if annual turnover is shown at 20%, this implies that 20% of your holdings are sold each year and replaced by others. In italics I show the percentage of the total portfolio value that is lost through dealing charges. I have assumed a £12 per trade dealing cost. So, taking the first example in the first table: if you have a portfolio of £5,000 split between five shares, and have an annual portfolio turnover of 20% (i.e you sell just one share and replace it with another) the annual cost of running your portfolio is just 0.6% of its total value.

a) Portfolio Size £5,000

b) Portfolio Size £25,000

c) Portfolio Size £100,000

5) Conclusion - Its Easy To Beat The Professionals!

If you have your money invested in a fund by a City professional you will pay about 2.5% per year for the privilege. Of the 27 theoretical cases set out in the tables above, in only five does the annual charge exceed 2.5%. In 20 out of the 27 examples the annual charges are 1.5% or less.

So by managing your portfolio sensibly, by making sure that you don't hold too many shares or trade them too regularly holding, you can save yourself the fees charged by City fund managers.

And remember: An investment of £10,000, which earns an underlying return of 10% over twenty years, will grow to £42,478, after annual charges of 2.5%. But if you have limited the annual charges to just 1.5%, you will have £51,120. You will be £8,642 better off because you have run your own portfolio and not trusted it to the City professionals!

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