TellinStories - new investor feedback please!

[TellinStories]

Dear all!

Firstly I am so pleased to have found this site. Twenty years ago I was a fresh graduate with no money, plenty of debt and some very poor spending habits and the old TMF boards became a regular haunt and very much informed and helped transform my money management. Since then I have been very conservative and risk averse with my money.

My risk aversion means that I have always been a saver rather than an investor. Two years ago I decided that my overall level of savings was such that I felt able to begin to invest albeit only "small amounts". I began putting £50, then £100, and now £200 per month into funds via a Fidelity ISA. This went up and I thought I was a genius... then it went down and while not too worried by this (these are long term investments) this has made me review how I approach investing.

I've learned a lot so far - often by making mistakes - and I'd appreciate any thoughts / advice going forward.

1) Platform: I chose Fidelity as the fees are very low if you have a monthly direct debit, and there are no transaction fees for buying most types of fund, however it charges £10 for purchasing individual shares or ETFs. This meant that I saved up to invest a lump sum in Scottish Mortgage. This negated the drip feed approach and meant I purchased at literally the wrong point. Therefore I've now also opened a Freetrade account to purchase individual shares and ETFs. This is not an ISA obviously but I'm a long way from having to worry about tax on dividends or CGT at this point.

2) Funds: my choice of funds was not always good, often based on what I'd read in the paper. I recently looked closely at the funds I was invested in and realised that I have a) invested in several that overlapped investments significantly and b) invested almost exclusively in actively managed funds c) been very tech-heavy. So I have selected a new portfolio of 8 funds (£25 / month into each), all 4* or 5* Morningstar rated. There are four cheap index trackers covering UK, Europe (ex-UK), USA, and Japan, as well as keeping four of the actively managed funds: Invesco High Yield bond fund, Fundsmith Equity, Rathbone Global Opportunities and Scottish Mortgage. The aim is to drip feed monthly, review annually and not worry too much.

3) Shares: The funds are meant to be long term and less risky investments with mine and my wife's joint savings. But I also have some of my own money that I can experiment with and so I have been buying individual shares in small amounts (usually £100) so that I can learn while having some fun. Top three holdings are Trident Royalties (I invested £500 and this is +25%), Darktrace (+75%) and GSK (only bought this week). Overall up about £250 for less than £2k invested but I appreciate that, apart from Trident which I bought at Xmas, these are all less than a month old and purchased during what I have read is a mini bull run.

Any thoughts and suggestions will be gratefully received!

[Breelander]

...Twenty years ago I was a fresh graduate with no money, plenty of debt and some very poor spending habits and the old TMF boards became a regular haunt and very much informed and helped transform my money management....

Welcome to Lemon Fool.

Twenty one years ago I was just starting on my investment journey and found TMF an invaluable guide, particularly the discussion boards. Now I'm retired and living off my investments.

When TMF closed their UK boards LMF was born, and many Fools came here to carry on the good work. I'm sure you will get lots of good advice, quite possibly from some of the same people.

BTW, did you know that when you signed up to TMF UK your account was also valid for TMF US? Your profile is still there....

Fool Since: March 7 2004

https://boards.fool.com/profile/TellinStories/info.aspx

...as is mine.

[JohnW]

Reads as though you’re level headed which is a win right there if you’re investing.
You used to be risk averse, but now you’ll invest in equities riskier than equity funds, ie individual shares, to experiment. I’ve never understood experimenting with my investing, perhaps because my finances are a bit marginal. Our circumstances are all different.
Individual stocks are not the best investment idea; they might turn out to be the best investments you ever made, but in theory and on average they're not optimal. People offer to reward you for taking a risk with your money (with bonds or stocks), but if you don’t have to take a risk you won’t get any reward offered (why would they?). It’s called uncompensated risk when you buy individual shares because you can diversify it away; and investors (on average) are not rewarded for taking unnecessary risk.
For people who own shares in every company, that one company going bad will barely affect them; not so people owning just one or several shares. People owning every, most, or very many companies will be happy to push up the price of the companies they own because the risk to them is small if any one goes bad.
Now picture the person owning only one company; when it goes bad that investor is massively affected and for this reason would not be as comfortable as the diverse investor putting their money at such risk. Put another way, the diverse investor can afford to pay more for any company than the single share investor because the diverse investor is at less risk if any one share fails. And as they can afford to pay more, they push the price up.
Since we all can be diverse investors, and many are, share prices are pushed up beyond the value that a ‘one share investor’ on average would think is reasonable. Basically, you’re taking on more risk, or paying more than the ‘average’ person would be comfortable to pay (so overpaying as measured by the wisdom of the market). It’s a bad deal.
A study from Toronto simulated different sized random portfolios and compared their annual returns with the broad market return. https://www.researchgate.net/publicatio ... d_Skewness
They concluded: ‘For investors holding only 15 issues, the bias is about 40 basis points per year, but for portfolios of 75 issues, the bias under each of the three portfolio approaches is, on average, under 10 basis point.’
The ‘bias’ is their measure of the under-performance between broad market returns on average and a less diversified portfolio on average. Their portfolio approaches were: randomly chosen shares of equal weighting; randomly chosen shares with capitalisation weighting; and equal weighting of each share held but a higher chance the portfolio held the bigger companies.
Some folk have taken away from this that with small portfolios there is a greater dispersion of return results: you can get onto some real winners, but similarly finish up with some dogs. But the distribution is not symmetrical; there’s more chance of finishing up with below market returns, and a smaller chance of outperforming.

Your fund selection looks a bit like a well aimed shotgun approach - fire carefully and hope to hit something good. Isn’t it better to consider how much risk you want to take in your mix of stocks/bonds/cash/whatever, and then choose diversified products to satisfy that mix at the lowest cost? Said that succinctly it omits a lot of relevant detail, but you get the idea?
I’m sure you don’t need to be reminded of the cloud hanging over much of the active fund management industry, but Morningstar research suggests management fees are the best single predictor of fund performance - the higher the fees the worse the performance. Have you examined your reasons for going beyond a fund or two that closely tracks a decent index or two?

[TellinStories]

BTW, did you know that when you signed up to TMF UK your account was also valid for TMF US? Your profile is still there....

Thank you for the welcome! No, I didn't know that my profile was still up - an interesting little time capsule of my twentysomething self!

Thanks again!

[TellinStories]

Your fund selection looks a bit like a well aimed shotgun approach - fire carefully and hope to hit something good. Isn’t it better to consider how much risk you want to take in your mix of stocks/bonds/cash/whatever, and then choose diversified products to satisfy that mix at the lowest cost? Said that succinctly it omits a lot of relevant detail, but you get the idea?
I’m sure you don’t need to be reminded of the cloud hanging over much of the active fund management industry, but Morningstar research suggests management fees are the best single predictor of fund performance - the higher the fees the worse the performance. Have you examined your reasons for going beyond a fund or two that closely tracks a decent index or two?

Thank you for replying John. I'm about to go away for a couple of days so not going to reply fully right now, but what you've said is useful and I will mull it over while away. Thanks again!

[JohnW]

Enjoy away. Don't feel you need to respond.

[tjh290633]

An interesting story.

I started investing aged 25 with a £3/month investing plan in a unit trust. I added to this with a £5/month unit linked insurance and the odd lump sum into a unit trust. Then at 37 my mother died and left me a few shares and fixed interest stocks. I still have AZN spun out of the ICI holding and MKS. The rest eventually were replaced with more unit funds, which were mostly based on Commodity shares or income producing shares. I added some more shares of present and past employers, then came privatisation and I ended up with a few, like BP. BT.A and BGAS.

Then PEPs began, and I started buying shares which paid dividends, laying the foundation for what is now my HYP.

The fundamental thing was to establish regular savings into a variety of funds, some insurance based, and to make as full use as I could of my PEP and ISA entitlements. Had I known then what I know now, I would have concentrated on Investment Trusts in the early stages. I have done that in bare trusts for my grandchildren.

You have to work with the situation as it is now. Sounds like you are moving in the right direction.

TJH

[forrado]

I've learned a lot so far - often by making mistakes - and I'd appreciate any thoughts / advice going forward.

For a kick off, stop learning from your own mistakes, and start learning from the mistakes of others.

In the words of Charlie Munger, my Number One Man when it comes to such matters, “Investors would be better served collecting and learning from the mistakes of others, rather than the slow and often painful process of learning from remembrance of one’s own mistakes.” However, Charlie Munger wasn’t the first to make this observation, for he readily admits he's never had an idea that someone hadn't thought of first. More than a century before the German Statesman, Otto von Bismarck, made the exact same observation “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.”

2) Funds: my choice of funds was not always good, often based on what I'd read in the paper.

Why am I not surprised. The news media, and its offshoots, are in the not always obvious business of persuasion of one sort or another. In terms of the financial media that persuasion process is more blatant, the sale to the end user of information. It’s only when the wheels come off will one witness the financial media turn on and bite the hand that previously fed it - by which time the damage has been done. When it comes to the press, the cynic in me is always questioning what story am I being sold.

So I have selected a new portfolio of 8 funds (£25 / month into each), all 4* or 5* Morningstar rated.

I’ve got some good words to say about Morningstar. While not perfect, I find they are genuinely trying to offer an unbiased service to retail investors. However, where I am wary is when it comes to the way Morningstar rate actively managed funds, it can be too algorithm rules based at times. For example, the automated process places too much emphasis on past performance which can seduce the investor into a false sense of complacency that can sometimes lead to disappointment. Having said that, Morningstar ratings are better than having no guide at all through the jungle of funds that are available. But there is still no substitute for the hours and time it takes to get one’s head round what an actively managed fund is trying to achieve, and the risks a fund manager is taking in the process. Once you can in-turn understand and recognize risk is when you’ll find you have a better grip on this investment game.

Twenty years ago I was a fresh graduate with no money, plenty of debt and some very poor spending habits and the old TMF boards became a regular haunt and very much informed and helped transform my money management. Since then I have been very conservative and risk averse with my money.

I suspect from the opening paragraph of your post that you are now into your 4th decade, while I’m now 5 years into my 7th decade. Believe me, if you are looking to accumulate assets – which I assume is your reason for becoming a Lemon Fool – then you will have to learn to take chances. The secret sauce is mastering the skill of taking the least risky of chances for hopefully the best return with what funds you have. If I can again turn to my Number One Man, Charlie Munger, when it comes to such matters, “Always better to be approximately right than exactly wrong". Charlie stole this quote from English economist, John Maynard Keynes, who in turn stole it from the pages of 'Logic: Deductive and Inductive' first published in 1898 by English philosopher and logician, Carveth Read. Which only goes to show there’s nothing new under the sun, only how we chose to interpret and apply it.