Page 42 - DIY Investor Magazine | Issue 29

INVESTING BASICS:
SIMPLE RULES FOR SUCCESSFUL INVESTING
Highly respected Investors Chronicle and Financial Times journalist David Stevenson is happy to practice as he preaches; here he shares his five rules for successful investing and considers the active vs passive conundrum.
Investing is a complicated business. There’s a constant din of noise surrounding every decision we make.
Do I buy this or sell that? Are the bears right or will the bulls triumph? Which fund works for me? Go active and bet on a manager or stick with a simple, cheap passive index tracker?
I have actively invested for over 30 years – and have learnt five very simple rules that I think hold true for most situations.
• Keep it simple if you don’t have the time for detailed due diligence; make sure you are diversified and don’t take too many punchy bets that may not work out.
• Keep costs to a minimum. That doesn’t always buying
the cheapest fund; a smart active fund manager might
be worth paying an extra 0.50% per annum over the very cheapest ETF, but you should really never pay much more than 1.5% for any fund regardless of the manager. Virtually everything about investing is uncertain except for the fact that excessive fees WILL destroy your wealth
• In my experience, most active fund managers fail to
add much value for those additional fees ; that’s not to
say there aren’t great managers out there, many in the investment trust sector, just that they are few and far between. One simple rule should help - in very developed, liquid markets such as the US it is not impossible for an active fund manager to beat Mr Market, but the chances are incredibly low. So in the biggest asset classes I invest in an ETF rather than an active fund manager, and the reverse is true in more complicated, niche markets
• Stick with dividends which compound up, and over many decades become the major source of total returns; these payouts can easily be captured by most fund structures
• The biggest gains come from the most concentrated, contrarian bets where your research tells you that over the long term the consensus will be wrong; timing is everything and you need other investors to capitulate and sell up.
So, how do these ideas translate into building a portfolio of ETFs?
Sticking with the theme of lists I’d keep to these golden rules.
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•
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Be properly diversified with exposure to lots of interesting alternative ideas within both equities and fixed income; embrace more contrarian ideas
Choose dividend orientated smart beta-style trackers which capture growth over time in dividends
Never pay more than 1% for any tracker fund, ever.
I think the best summary of the attributes to look for in a good active fund manager comes courtesy of one of the best, John Chatfield-Roberts at Jupiter, who says they should:
• Have the necessary skills built in; there is no exam to make you a good fund manager;
• Be inquisitive, hardworking and ultra-competitive;
• Think independently and focus on what’s relevant; not
become bogged down with irrelevancies;
• Have the humility to admit and rectify mistakes - it can take
ruthless action to sell severely loss making stocks that are
hurting the portfolio;
• Stick to a proven investment process even when it is not
currently working;
• Be sufficiently experienced, having been exposed to
several market cycles
• Be in tune with the psychology of the market.
This is an excellent checklist of attributes that I think any investor researching a fund should focus on.
DIY Investor Magazine | Jun 2021 42