When to Top Slice

[Merkinglue]

Good afternoon wise Lemons.

I have a small portfolio I run with my teenage son to try and help him understand long term investment and saving for his future.

It is a fairly eclectic mix of shares that were chosen by him as companies he was interested in.

One of his picks was JD Sports, he chose it because he spends money in there.

The dividend return is pants (Around 0.2%) but his capital growth has been impressive, currently over 200%. This growth has skewed the balance as it now forms 12% of his savings, I think he needs to diversify.

How do you all approach top slicing? I think the time is ripe to sell off some of the shares and invest in something giving a better dividend return. He is a bit hypnotised by the growth. I think this is a great opportunity to teach him a little more on investment strategies.

Any suggestions on continuing his education greatly appreciated.

Do any of you have any quick and dirty "Rules of Thumb" around top slicing.

[tjh290633]

I have posted my method of deciding when to top slice a holding many times. The first occasion on which I top sliced was in 1997, when the then Lloyd's TSB rose to about 16% of the portfolio value, the then Zeneca also rose to about 12%. I decided that I would set an arbitrary limit for my portfolio of about 18 shares and trimmed both back below that level.

Later because of ISAs being introduced in parallel with PEPs, with no means of moving from one to the other, my portfolio had risen to the mid 20s and I changed my limit to twice the median holding value. The size determining factor is the economic size of trades, which will vary according to the cost of them. Stamp duty cannot be avoided in purchases, but low cost dealing days will help. Ideally if the transaction cost is less than 1% for purchases, half that for trimming sales, then that will make it economical.

My portfolio is now in the 30s, and the typical holding size has increased somewhat. Accordingly, my limit is now 1.5 times the median holding value. Typically I have need to trim overweight holdings 2 or 3 times a year.

I have a system for deciding which holding to top up, which has been embodied in the HYPTUSS tool, links to which you will find on this site.

Hope that helps,

TJH

[monabri]

TJH's aims, I believe, are different to yours. Broadly, his methodology is to ratchet up annual income in terms of dividends by selling, in part, a share that has done well recently and then to recycle the money into a share that is "on a downer" but which offers a higher yield.

In the case of your son and saving for the future, I would be tempted to top slice 100% JD Sports and invest in a couple of investment trusts such as FGT, FCIT, WTAN, BNKR. In this way you are diversifying in both quantity of holdings (reducing risk) and obtaining a higher yield than 0.2%. The lessons being diversification & risk. Will JD Sports be around in 30/50 + years time when your son needs to support his pension?

(p.s. the operating margin for JD Sports ain't that brilliant for a growth share!)

http://financials.morningstar.com/ratio ... ?t=xlon:jd.

[BusyBumbleBee]

I have a small portfolio I run with my teenage son to try and help him understand long term investment and saving for his future... Any suggestions on continuing his education greatly appreciated ... Do any of you have any quick and dirty "Rules of Thumb" around top slicing.

I don't have rules for top slicing - I just sell out completely if the SP looks like stalling
.
To continue his education you need to explain the old adage "run your winners..." See here for a reasonable explanation https://www.sharesmagazine.co.uk/articl ... ur-winners.

Wish my grandchildren would take an interest and get into the same dilemma.

with kind regards - BBB

[simoan]

I would buy him a copy of this for Xmas: https://www.amazon.co.uk/Art-Execution- ... 085719495X

And then let him work it out for himself. I would not personally take advice about when to buy or sell from anyone else. It took me years to find out you have to find out what works for you personally, and it's best to get him to do that as early as possible.

All the best, Si

[Dod101]

I would buy him a copy of this for Xmas: https://www.amazon.co.uk/Art-Execution- ... 085719495X

And then let him work it out for himself. I would not personally take advice about when to buy or sell from anyone else. It took me years to find out you have to find out what works for you personally, and it's best to get him to do that as early as possible.

All the best, Si

I have been wrestling with Simoan's point as well. The best way for your son to understand how the stock market and investing works is for him to make the decisions, right or wrong. He needs to get things wrong occasionally for him to discover things fro himself. If he wants to run the risks of having a share which is unbalancing the portfolio let him get on with it. Obviously you could say that it might be sensible to think about top slicing but let him decide. He is young enough that mistakes will not matter in the scheme of things and making them is part of his learning.

The Art of Execution is a good book for him to read, showing some of the contrasting investment styles, and of course there are many others from which he could learn.

Dod

[Merkinglue]

Thanks for the pointers folks.

I'll drip feed this information to him over the Christmas school holiday.

Wise words about letting him learn from his own mistakes. Especially now whilst his nest egg isn't massive and has lots of time for compound interest to work its magic.

[Itsallaguess]

Do any of you have any quick and dirty "Rules of Thumb" around top slicing.

The day after you find yourself telling someone how well one of your holdings has done, sell half of it and diversify the capital into something else.

Cheers,

Itsallaguess

[TUK020]

Do any of you have any quick and dirty "Rules of Thumb" around top slicing.

It has been said that diversification is the only free lunch in improving you risk/reward balance.

Traditional HYP doctrine (as in the Bland Annuity Replacement strategy) advocates around 15 shares in different sectors to minimise individual company and sector risk. These 15 shares at about equal capital weight (=~6.7% each)
Going for more than 15 shares does reduce risk further, but with diminishing returns.

In my portfolio I run to about 30 individual shares (many doubled up in sectors, e.g. 2 Oils, 2 Pharma, 2 Mining, 2 Tobacco etc), plus further geographic and industry diversification using Investment Trusts.

Borrowing from TJH's methodology, I top slice when a holding reaches 1.5x median holding size, and then top up using the HYPTUSS approach (combination of lower capital weight plus higher yield).

If you have 15 or less holdings, and one was to reach 12% capital, then I would be tempted to:
- if it was a reasonable yielder, top slice by half to create a new holding
- if it was a negligible yielder, then sell out completely
With the funds then:
- either get a new holding if I could find one in a new sector at decent (above FTSE Market yield), that seems sustainable/low risk
- or get wider diversification by going for a ETF index tracker, or a higher yielding Investment Trust.

Monabri's words are worth a close look

[tjh290633]

With 15 or fewer holdings, twice the average is going to be between 15% and 20% of the portfolio value. I would agree that getting to twice the average or median value would be a good indicator for selling half and buying another new holding.

Alternatively reinvest dividends and new money into reinforcing the lower weight holdings to raise the average.

TJH

[monabri]

The concern being that you have "got lucky" with JD but the "eclectic mix" might more than cancel any gains.

[Merkinglue]

The concern being that you have "got lucky" with JD but the "eclectic mix" might more than cancel any gains.

The eclectic mix came about by discussing which shares he was interested in when he was only 12 years old. It was little more than sticking a pin in a list really. His knowledge of companies being limited by his exposure to life. A few of his picks(with impeccable logic annotated below)

Lloyds_________ I have a savings account there Down 14%
Barratts_______ We live in a Barratts house Up 20%
Redrow________ We are moving soon to Redrow house Up 66%
Marstons_______ We sometimes eat there Down 2%
JD Sports_______ I like their trainers Up 217%
RDSB___________ That's where dad gets petrol Down 10%
Smiths Industries Dad was contracting there Up 45%
Vodafone________That's my SIM card Down 30%

Overall he has a capital growth of around 15% and is getting a dividend return of 4.6% according to Hyptuss.

He has been lucky (Done better than me for sure Carillion anybody?) now I want to help him learn a bit more while he rides his luck.

Cheers for some great advice, it will be a battle to get his attention over Christmas, but one worth fighting.

[Dod101]

I won't prolong this interesting discussion, but he seems to me to have not a bad portfolio there. maybe we should all try his logic.

Dd

[AJC5001]

One option nobody has raised so far is to sell sufficient to get back the initial investment. This would give you back enough to make an investment in a new share (or top up one or more existing ones), and leave the 'profit' from the winner to continue running (run your winners ) knowing that you'd never lose money on it.

If it then ceased winning, you could still sell out at a profit.

If only all shares would behave like this.

Adrian

[stressor]

This is my opinion on top slicing or more generally when to sell (in declining order of importance)

1. When you need the money in cash > then you sell regardless
2. When you see (or strongly predict) a decline in price which will not recover until #1
3. When you suspect a stall in price relative to other investments, and want to transfer
4. When you predict a temporary decline in price more than the cost of reinvesting later (buying and selling and buying again)
5. (If investiging for income) when dividends are cut and the growth potential cannot compensate
6. (If none of the above but) company fundamentals change (for example a stock screener shows a problem).

any other reasons?

[Dod101]

This is my opinion on top slicing or more generally when to sell (in declining order of importance)

1. When you need the money in cash > then you sell regardless
2. When you see (or strongly predict) a decline in price which will not recover until #1
3. When you suspect a stall in price relative to other investments, and want to transfer
4. When you predict a temporary decline in price more than the cost of reinvesting later (buying and selling and buying again)
5. (If investiging for income) when dividends are cut and the growth potential cannot compensate
6. (If none of the above but) company fundamentals change (for example a stock screener shows a problem).

any other reasons?

An obvious other reason is when a particular share is getting to be too big a share of my portfolio would be my main reason to top slice. Many of your points would indicate a need probably to sell out of the particular share. I have done that twice this year, once when Unilever hit £50 and the other when AstraZeneca hit £70, but since then it has had a stellar run and is up again today. Unilever is well off £50

Dod

[Bubblesofearth]

The concern being that you have "got lucky" with JD but the "eclectic mix" might more than cancel any gains.

The eclectic mix came about by discussing which shares he was interested in when he was only 12 years old. It was little more than sticking a pin in a list really. His knowledge of companies being limited by his exposure to life. A few of his picks(with impeccable logic annotated below)

Lloyds_________ I have a savings account there Down 14%
Barratts_______ We live in a Barratts house Up 20%
Redrow________ We are moving soon to Redrow house Up 66%
Marstons_______ We sometimes eat there Down 2%
JD Sports_______ I like their trainers Up 217%
RDSB___________ That's where dad gets petrol Down 10%
Smiths Industries Dad was contracting there Up 45%
Vodafone________That's my SIM card Down 30%

Overall he has a capital growth of around 15% and is getting a dividend return of 4.6% according to Hyptuss.

He has been lucky (Done better than me for sure Carillion anybody?) now I want to help him learn a bit more while he rides his luck.

Cheers for some great advice, it will be a battle to get his attention over Christmas, but one worth fighting.

To put a 12% weighting into perspective it's worth noting that, last I looked, Shell comprises almost 10% of the FTSE100. However, I would be inclined to sell half JD Sports more because a portfolio of 8 shares is not IMO sufficiently diversified. Maybe look at reinvesting the half in a company in a sector not yet covered, e.g Pharma, utilities, mining.

Mercifully we are on Investment Strategies here so no need to bow to silly notions that somehow dividends are better than capital growth. Money is money!

BoE

[xeny]

How do you all approach top slicing? I think the time is ripe to sell off some of the shares and invest in something giving a better dividend return. He is a bit hypnotised by the growth. I think this is a great opportunity to teach him a little more on investment strategies.

.

Why not top slice and put that into something else with good growth prospects? At that age I wish I'd been more interested in growth than in income.

[Itsallaguess]

Mercifully we are on Investment Strategies here so no need to bow to silly notions that somehow dividends are better than capital growth.

Money is money!

I'd suggest that the only 'silly notion' in the above is that you can find anyone who might actually state that 'dividends are better than capital growth'.

You might find people who perhaps state that 'dividend investing is a good enough strategy for me', but that's entirely different to the straw-man suggestion that you seem to want to make above...

Don't worry - you're not the first to mistake the two situations and create an exaggerated straw-man argument, and I'm sure you won't be the last, but please do try to distinguish between investors who might want to carry out a particular investment strategy because -

1. It delivers their investment requirements.

and

2. It does so in a way that they find simple and easy to implement.

and those who might actually say what you're suggesting, which is that 'dividends are better than capital growth'.

There's plenty of people here in the first camp, but I'll be stunned if you can find a single example of someone on these boards in the second...

Whilst you're looking for one, please try to keep the clear distinction between those two sets of investors in mind....

Cheers,

Itsallaguess

[AsleepInYorkshire]

I've recently started investing for (with) my daughter. She's 12. She wanted to think about Primark because she shops in there. We chatted about how she should make her decisions. The first guidance I gave her was to learn about EPS. We're still on that subject

Yes. We should all learn by our mistakes and we should all be allowed to make them. However, I subscribe to a huge caveat therein. I think it's also wise to understand how others have lost their shirts. It's possible to learn from "others" mistakes. And that's cheaper.

In specific response "when to top slice?" I'd caution top slicing too early because it's over-weighting a portfolio. If the stock is on a bull run and has some momentum behind it then top slicing will deny future capital gains. In the particular situation you are reviewing I'd look at the EPS forecasts for JD and watch for Newsflow which may indicate a slowing rate of growth and review the holding on it's own merit. Top slicing could become "churning" if it's not done correctly. And that could be expensive. If you feel the "weighting" within your portfolio is not to your liking I wonder if you should consider purchasing funds which will remove some of the detail needed to invest in specific stocks.

AiYn'U