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What to invest in?

Well, this really is the 64,000 dollar question!

Unfortunately, I’m not permitted to tell you exactly what you should invest in, as that can only be done by an authorised financial advisor, who will likely charge you for such advice.

What I can tell you though, to help you make your own investment decisions, and save on financial advisors fees, is what I have learned during the past three decades of investing, and what worked well for me.

By now, you will have a good overview of what classes and types of investments are available to you, and so it is just a case of deciding which ones to go for, to build up your portfolio of investments and assets. This is known as asset allocation.

 

Best buy lists

Initially, trying to decide upon which investments to buy may seem like a huge task, after all, there are literally thousands of funds and investments to choose from.

However, fear not, you can ignore most of them if you want to, as the platform providers have already done some due diligence on many of them, and have created their own “best buy lists ” or “recommendations lists” which vastly narrow down the choices for you.

These lists will usually contain about 40-80 “recommended funds” and will also be sub-divided into specific areas, such as global equity, UK equity, worldwide bonds, and commodities etc.

This makes it much easier, because if you have decided as part of your investment strategy, that you wish to invest in the UK equity income sector, there will probably only be about three or four of these funds listed under the recommendations lists, and then it is down to you to review all of them and make the final decision yourself.

Just relax

Don’t get too stressed about picking the very best fund that will perform better than all the others over time. If you want to, you can choose two from the same sector if you like them both, and they have different approaches and holdings.

Even if you change your mind in the future, or the performance of your chosen fund lags the sector, it is easy to switch to another fund. You investment selections are not set in stone, or even for a minimum period of time.

This is one of the benefits of platforms, they really are very flexible, and will buy, sell and switch your holdings as often as you want to, although you should refrain from doing too much switching once you have made your selection, as some platforms do charge for this.   

Build a diversified portfolio     

You may have heard of the word “diversification” or the phrase “build a diversified portfolio” within financial articles, and this is a very important component of your future investment strategy.

It is the financial equivalent of “don’t put all your eggs in one basket.”  i.e. don’t put all your money in one investment, one sector, one country or one share etc.

As a young or new investor, it is sensible to start your investment plans with funds or trusts that automatically provide you with some form of diversification, as they invest in many different companies, sometimes hundreds or even thousands, all at the same time.

The danger of buying individual stocks and shares is that there is no diversification at all when you are just starting.

If you see a tip in the newspaper on Sunday, then decide to buy it on Monday with your full £1,000 allowance, if it collapses to zero on Friday you have lost it all.

On the other hand, if this same company was part of a fund as it collapsed, you will probably have only lost a maximum of 1%-2% of your investment, as all the other holdings in your fund, will still be trading.

TIP: A fully diversified investment portfolio, is what you should aim to create.

Newspaper share tips

Speaking of share tips, I certainly don’t recommend you buy shares based on any tips in the newspapers, magazines or internet chat rooms.

At best, by the time you are able to buy them, they have already increased in price because the brokers or market makers have also read the same article as you, and have pushed the price up. (Remember supply and demand).

Once you have managed to buy them, at the higher price, others will sell at a profit, and you will be left with a loss.

Chat room tips

Chat room share tips are even worse. Don’t listen to a word of it, it is all total rubbish. Save yourself both time and money, by not getting involved from the outset. Enough said!

They can’t go any lower!

Another quick point to make whilst we briefly discuss individual shares, is that of trying to grab a bargain, following a major share price drop.

This is sometimes called trying to catch a falling knife!

Just because a share has dropped from say £1.00 to 50p in a day doesn’t mean it is good value, and it also doesn’t mean, it can’t go down any further.

One of my first mistakes as a novice investor, many years ago, was coming to the conclusion, that a well-known supermarket at the time “couldn’t get any lower” after losing half its value in a day.

I bought in the following day, (by telephone of course) using a broker, and secured what I thought was my half-price investment. By the end of the same day, it had halved again, and ultimately collapsed to zero, a few weeks later.

Lesson learned. Any share price can get lower, and ultimately down to zero. 

How to achieve broad diversification   

As can be seen, building a diversified portfolio is a sensible option for most. But how exactly do you do that, especially if you are just starting with a fairly low monthly contribution?

The easiest way to gain broad diversification these days from a standing start, is to simply buy either a single fund, trust or ETF, that covers the whole universe of mainstream asset classes, as well as a worldwide geographical approach.

The advantage of such a fund is that all the work has been done for you. It will contain both income and growth stocks from around the world, all types of bonds including investment grade and high yield, it will also include property and commodities such as gold, silver and oil. 

If you put your monthly investment allowance into such a fund whilst starting out for the first few years, it should certainly provide you with a good core holding to build upon in the future.

 

Example of a diversified SIPP portfolio here, a visual example of what a broadly diversified portfolio may look like. 

 

Diversify it yourself

If you have a bit more money already saved or invested, or you are more experienced, or just want to get more involved with picking your funds, then it can be good fun to create your own diversified portfolio from the ground up.

How many funds you include, and how specific each of your funds is, depends entirely on the amount you already have invested, and are able to continue contributing to, as well as your own experience.

For example, if you have £1,000 to start investing with, you probably wouldn’t select ten different funds and put £100 in each as that may be spreading your money slightly thinly.

Although if you also knew you were going to add another £100 each month to all these funds, then having the ten, and seeing how they grow, and perform, would be a worthwhile approach, and provide some great “live” experience.

The more adventurous investors amongst you, who wish to do your own fund research and picking, to create your own bespoke portfolios, certainly have plenty of choices.

You could choose a fund for North American shares, UK shares, European shares, Asian shares, smaller company shares, income shares, growth shares, bonds, property and commodities.

Within each of these categories, there may be as many as a hundred individual funds to choose from, so with ten categories selected, that gives approximately one thousand different funds to review!  

This level of fund selection isn’t everybody’s cup of tea, but if you do it, you will learn how the individual markets and sectors move in different ways, and at different times.

It should also show you that when some markets go up, others go down, as can be expected with a diversified portfolio. 

Every years a winner

The advantage of such a broad diversification is that you can guarantee every year you will have been invested in the best performing sectors. Which is great news.

The not so good news is, that you will have also been invested in the worst performing sectors as well, but this strategy is just far easier than trying to predict the best-performing markets in the future. Nobody can, not even the so-called experts.

Over time, the best performing sectors should outnumber and outperform the poor performing sectors, producing an overall long term uptrend of growth and value.

TIP: To get a good idea of how different sectors perform each year, Google “periodic investment table” and take a look at the latest version. It clearly shows that there is no pattern that can be predicted, indicating which asset class will perform best over any period of time. One year it could be equity markets, the next it could be fixed income or property. This should highlight the fact that it is easier owning a little of all of them, as opposed to trying to pick next year’s winners.

Rebalancing 

Once a year when you do your annual investment portfolio review, it is worth being aware of a practice called “rebalancing”. Whilst I do advocate the invest and forget approach for any well-diversified portfolio, there may come a time when a certain amount of rebalancing of your investments could be worthwhile.

Rebalancing simply means bringing your assets back into the allocations you originally made, when you created your investment strategy.

By way of a very basic example, if your original asset allocation was 50% shares, 40% bonds, 5% commodities and 5% cash on the 1st January one year, and then when you conducted your annual review in December later that same year, the new allocation was 65% shares, 30% bonds, 2.5% commodities and 2.5% cash, then you are now “overweight” in equities, probably due to a rising stock market.

To keep your asset allocation as intended, and keep your Risk v Reward appetite in check, you need to rebalance your portfolio by selling some equities and re-investing in bonds and commodities, to bring them back up to your targeted allocation. This then forces you to lock in profits when prices are high, and redistribute that cash amongst less expensive assets.  

Check the fees

Remember to check the fees charged, as they can make a big difference over long periods. A fund may charge 1% per year, whilst an ETF or tracker providing similar exposures may only charge 0.1%. That’s ten times cheaper per year, every year! This can add up to tens of thousands of Pounds during an investment horizon of many decades.

The key fees to look out for, are the AMC or Annual Management Charge, and the TER or Total Expense Ratio. When you are comparing funds, trackers or ETF’s, you should look at these figures, to make sure you are not paying over the top.

Also remember, as well as the fees above, you will have to pay the platform service charge, which could be in the region of another 0.20% - 0.45% on top.

Model portfolio examples

As you will recall from an earlier chapter, everybody has their own approach to risk and therefore has their own individual risk profile and appetite.

This means there isn’t a one size fits all portfolio that suits all risk types and all ages.

What we can do though, is provide a broad overview of what a portfolio of investments may look like for certain age groups.

Teens and twenties

  • Equities – 70% - 80% (Worldwide exposure including growth, income, and emerging markets) 

  • Bonds – 10% - 20% (Worldwide exposure including Government debt, investment grade, and high yield)

  • Property – 10% - 15% (Worldwide including commercial property, REITS and shares)

  • Commodities – 5% (Broad basket of commodities including precious metals, industrial metals, oil and soft commodities)  

 

Those in their late teens and twenties age group have the greatest commodity of all. Time.

The majority of their portfolios should be invested in equities, as they have the time to ride out any market turbulence and benefit from compound interest over decades.

If I knew then what I know now, I would have invested 100% in equities as a twentysomething!  

Thirties and forties

  • Equities – 60% - 80% (Worldwide exposure including growth, income, and emerging markets) 

  • Bonds – 20% - 30% (Worldwide exposure including Government debt, investment grade, and high yield)

  • Property – 10% - 15% (Worldwide including commercial property, REITS and shares)

  • Commodities – 5% (Broad basket of commodities including precious metals, industrial metals, oil and soft commodities)

 

Those in their thirties and forties are still able to take some significant risk, as they too should have at least two decades to go before needing to draw on their funds.

It is possible, that there may be some adjustments with the percentage equity holdings moving down very slightly, but overall, equities should still form the bulk of the portfolio.

 

Fifties

  • Equities – 50% - 80% (Worldwide exposure including growth, income, and emerging markets) 

  • Bonds – 20% - 30% (Worldwide exposure including Government debt, investment grade, and high yield)

  • Property – 10% - 15% (Worldwide including commercial property, REITS and shares)

  • Commodities – 5% (Broad basket of commodities including precious metals, industrial metals, oil and soft commodities)  

 

During peoples fifties, thoughts of retirement loom, and many peoples investment portfolios are reviewed and updated.

It is again possible, that some people will adjust their equity holdings down slightly if retirement is within 5 years or so, but on the other hand, some people may keep a large equity position, but adjust it to become more income-focused, so they start to generate more income from their equity holdings, which is automatically reinvested. 

Sixties +

  • Equities – 25% - 50% (Worldwide exposure including growth, income, and emerging markets) 

  • Bonds – 35% - 60% (Worldwide exposure including Government debt, investment grade, and high yield)

  • Property – 10% - 15% (World-wide including commercial property, REITS and shares)

  • Commodities – 5% (Broad basket of commodities including precious metals, industrial metals, oil and soft commodities)  

 

Investors in their sixties may have already started taking an income from their portfolio or will do so shortly.

This age group usually reduces equity holdings and increases bond holdings to ensure a reliable and stable income can be generated.

They would probably also keep a reasonable proportion of equity holdings in their portfolios, to protect them from inflation, as they will be aware, they could still have another 20 or 30 years of income needs ahead of them.