Standard Life and Strategic Ignorance

Avid readers will recall that back on 19 April 2011, I kicked off Mia’s portfolio with the purchase of 250 Standard Life (LSE: SL.) shares for a price of 211.202 pence each.

 

Today I’d like to revisit Standard Life (SL) and this purchase to illustrate some key points about market volatility, timing and the long term ‘ignore the noise’ approach of the Child Millionaire strategy.

 

For those not following the movements of SL on the London Stock Exchange (and who is besides a bunch of financial anoraks?) some six months on, the price right now for SL is hovering around 223 pence per share. This comes hot on the heels of last night’s announcement of yet another fudgy ‘fix’ of the euro zone sovereign debt crisis. So on paper the SL component of Mia’s portfolio is up 5 % in only half a year, which is nothing to be sneezed at in these dire economic times with savings accounts paying about 1% per annum. So surely I can pat myself on the back in the knowledge that the purchase, and my timing, was a stroke of financial genius on my part. Except clearly it wasn’t.

 

In the intervening six months there has been tremendous volatility in global financial markets as economies seemingly stumble towards a fresh recession and European leaders take their time over a year-long Continental lunch to get a grip on the magnitude and severity of the euro zone crisis.

 

In early August 2011 global markets all plummeted again. The London Stock Exchange’s FTSE 100 index bottomed in early October at 4791, down 21.5% from a high of 6105 at the beginning of May. A few weeks after I bought SL for Mia’s Portfolio. Over the same time period, SL increased to 225 pence in early May before getting sucked down with the rest of the market and bottoming at 172 pence on 8 August after freefalling 18% in a matter of days. Yet here we are now two-and-a-half months later back up at 223 pence per share.

 

This roller coaster ride illustrates a number of key points about investing and the Child Millionaire strategy. If you’d been watching the share price like a hawk as opposed to thinking in terms of decades and having a life, there is every chance that as SL dropped like a rock you’d have sold out in a panic. Lots of armchair investors and people down the pub like to think they’d buy in as the price drops (and is risk is squeezed out of the system) but the reality is exactly the opposite. People believe that immediate past is a guide to the immediate future. So most small retail investors (like us) buy high (when risk is high) on the euphoric drug of greed and the belief in the unstoppable ever rising share price and then sell out in panic as the price drops believing it will never stop falling.

 

However if you’d have adopted the Child Millionaire approach of ‘strategic ignorance,’ meaning buying high quality dividend machines like SL based on their fundamentals, and ignore the overall market swings, you’d be sitting pretty. With a semi-annual check-up, you’d see SL pretty much where you bought it – perhaps up a few percentage points – all without the sweaty palms and knots in the stomach and irrational temptation to sell, none the wiser that the share price had been dragged all over the map by market volatility. More importantly, you’d now be, as I am, looking forward to 18 November which is when SL pays its interim dividend, something that is entirely unaffected by the share price.

 

With an automatic dividend reinvestment plan in place this dividend will automatically be reinvested in more SL shares for Mia’s portfolio. If I’m lucky, the markets will be spooked again and tank in the next few weeks pulling SL down with it meaning that Mia’s automatic dividend reinvestment scheme will acquire more shares resulting a greater compounding effect over time.

 

With long term dividend investing for your Child Millionaire Portfolio, ‘strategic ignorance’ is your friend.

 

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