Generate growth via thorough research and little action

Peter holds his portfolio in a stocks-and-shares individual savings account (Isa) and his investment objective is to grow the portfolio as much as possible before he reaches age 65-70.

"I imagine that at that time I will move my money into income-paying funds and trusts," he says. "In the meantime, all being well - if I remain employed and don't have any unexpected bills to pay - I intend to invest 10-15 per cent of my salary into the portfolio each month for the next 35-40 years.

"I'd like to achieve a 5 per cent a year return, in line with historic equity returns, but I don't know if this is realistic. Who can say if we are entering, or are already in, a period of long-term global stagnation? I hope that by investing globally I am giving myself the best chance of achieving good equity returns. I also have strong faith that equities are the best source of returns over long-term investment periods such as mine.

"As I am starting from a very low base I have little to lose at this stage. I understand that the events of 2008 were incredibly testing for private investors, and that similar market downturns will occur in the next 35 years, but I like to think I have the stomach to withstand them. My intention is to keep feeding my monthly investments into the market for the next three decades, through up and down turns.

"I don't have much investment experience, however my approach is to invest around 40 per cent of my portfolio in global equity tracker funds to broadly back the long-term prospects of global businesses. I also have small allocations to property and bonds.

"I then invest another 40-50 per cent in actively managed funds. I understand all the downsides and risks of actively managed funds, but I think I have a better chance of finding a good professional equity manager who will perform over the next five to 10 years than I do of finding an individual company that will perform over that period. And while active funds on average don't necessarily beat the market, the best active managers do. That said, as there is no guarantee that I will find these managers am I better off sticking with tracker funds?

"A large part of the reason I have multiple holdings, rather than just a single global equity tracker fund, is because I am seeking to make my investing more interesting. I hope my approach at least helps me to avoid other behavioural mistakes such as overtrading, meddling constantly with the portfolio, and buying high and selling low.

"I reinvest income by using accumulation funds where available.

"I have on my watchlist:

FP CRUX European Special Situations (GB00BTJRQ064)

Fidelity Global Dividend (GB00B7GJPN73)

ConBrio Sanford DeLand UK Buffettology (GB00BKJ9C676)

BlackRock Pacific ex Japan Equity Tracker (GB00BJL5C004)

"In addition to my stocks-and-shares Isa, I have £7,000 in cash in high-street bank current accounts earning 4-5 per cent interest.

"And I have £2,250 invested with peer-to-peer lender RateSetter, which is earning a rate of around 6 per cent a year. I understand peer-to-peer lending is high risk and I don't necessarily expect to get the money back. I plan to leave it there to compound, hopefully for the next 35 years if RateSetter is around that long. I will transfer this holding into an innovative finance Isa once it is available."

Peter Snow's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You're doing a lot right. In starting saving so young, you are - if we have average luck - exploiting the best friend an investor could have: the power of compounding. Over the long-run, your wealth depends more on how much you save than on precisely how you invest, unless you do something really outlandish.

You're also right to use accumulation units to reinvest dividends, because it's likely that these will account for the bulk of long-run returns. Let's say the global economy grows by 2 per cent a year in real terms and that dividends grow at the same rate. And let's say that current dividend yields are 3 per cent: it's more in the UK, but less overseas. It follows that dividends will account for three-fifths of your total return.

I also like the fact that you're awake to the behavioural errors that investors make, such as trading too much. This is the first step towards avoiding them. But it's not a sufficient one, however, because weakness of the will and overconfidence can lead even well-informed investors astray. If you haven't done so already, read Daniel Kahneman's Thinking Fast and Slow for a discussion of the many errors of judgment that we are all prone too: it'll help you in your life as well as your investing.

I also like your awareness of the risks of peer-to-peer lending. Be aware, though, that this is a form of tail risk, which is probably correlated with equity risk. With peer-to-peer lending returns can look good for a long time, until you are wiped out by a default - and such defaults are more likely to happen in bad economic times when your equity holdings are under water.

Martin Bamford, managing director at Informed Choice, says:

I assume you already had the basics in place before you started investing. You should be free of any short-term, unsecured debt. Your budget should be under control each month and you should have an emergency fund of cash savings equivalent to six months essential expenditure.

I would love to know where you are getting 4-5 per cent interest on your high-street bank current accounts, as the most competitive instant-access accounts pay just 1.3 per cent, and that's with a short-term bonus attached. If 4-5 per cent interest was available in the current economic environment, you would be mad to expose any of your money to equity risks and instead put it all in cash, with no fund management charges.

But you have got so much right with your approach to investing. You have a huge amount of time on your side which, combined with the pound-cost averaging from regular monthly investing, allows you to take substantial equity risks and hopefully benefit over the long term from higher returns. You are well diversified and have a pragmatic approach to the passive/active fund management debate, which I consider a positive approach.

Adrian Lowcock, head of investing at AXA Wealth, says:

You have clearly thought about your investments and what you want to achieve with them, and while you may lack experience the approach you have taken so far is unlikely to cause significant problems. You are not taking huge amounts of risk and have a good long-term focus. But in your planning there are a few things that need attention.

The first is behavioural: you recognise that you have too many holdings for a start-up portfolio. You want to keep investing interesting, but this is dangerous, as keeping things interesting often means tinkering. Investing is all about thorough research and very little action.

So far this has only resulted in having a few too many holdings for a start-up portfolio, but around the right amount for a more established portfolio. However if this continues you will suffer from over-diversification where you hold a lot of funds that are too small to contribute to performance.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

I'm not sure you should have "strong faith" that equities will do well over the long term. The fact that the Nikkei 225 is still far below 1989's level, and the FTSE 100 below 1999's level, reminds us that long-term returns can be poor. Not only is there the unquantifiable danger of secular stagnation, but also, even if returns are good on average, your luck might not even out even over a period as long as 30 years. Simple maths tells us that with 15 per cent annual volatility the standard error of annualised returns is 2.7 percentage points. This implies that if equities outperform bonds by three percentage points a year on average, there's a one-in-seven chance they'll underperform over a 30-year period.

This argues for keeping some portion of your wealth out of equities.

My bigger quibble, though, is with your claim that you have a chance of finding a fund manager who can do well over five or 10 years. What information can predict fund manager outperformance?

For ordinary equity funds, it's not recent performance. Research by passive fund provider Vanguard shows that of the top 20 per cent of funds over the period 2003-08, only 12.8 per cent stayed in the top 20 per cent in the following five years, and almost two-thirds fell into the bottom 40 per cent or shut down.

I've two suggestions here. First, you might want to consider some private equity funds. There's evidence from these that good past performance does lead to future performance, because good managers can use their reputation to get access to better companies or to improve their performance.

Secondly, funds might be a way of getting access to factors that beat the market. CF Woodford Equity Income Fund (GB00BLRZQC88), for example, might be attractive simply because it is heavily weighted towards higher-yielding defensive stocks - which history tells us tend to outperform on average over the long run. Whether such outperformance exceeds the higher fees on the fund is, however, moot. You are wise to have a hefty weighting in trackers.

Martin Bamford says:

If there is room for improvement, you could simplify things at this early stage of accumulating wealth. Given the amounts involved, you probably hold too many different funds, partly I suspect in the search for some excitement from investing.

Investing done properly should be fairly dull. You could get the results you are looking for by picking and holding one global equity tracker fund and one global equity actively managed fund. Vanguard Global Small Cap Index (IE00B3X1NT05) and Lindsell Train Global Equity (IE00BJSPMJ28)* already feature in your portfolio and are really the only two funds you need at this stage.

This approach would serve you well until you build up a more sizeable portfolio of say £50,000, at which stage you might consider more diversification across single asset funds, so you can control the country allocation.

You are quite right in thinking that you stand a better chance of selecting suitable funds than picking the right individual companies in which to invest. Given the relatively small size of your portfolio, you benefit from economies of scale by using collective investment funds: buying individual company stocks would be costly and inefficient for a small portfolio, even with the services of a low-cost online broker.

I would urge you to find something else to occupy you as a hobby, dramatically simplify your portfolio, invest and forget. Checking on progress once a year and upping the contribution levels when you can afford it as the result of a pay rise would be preferable to taking too much interest in picking funds and overthinking the general investment strategy. You're 90 per cent of the way there with your understanding of investing and the behavioural pitfalls.

Adrian Lowcock says:

You need to think about portfolio construction a little more. Splitting between trackers and active to reduce costs can be a bit of a false economy, but as a beginner investor it is a good place to get started as it allows you to build up your knowledge and experience without making too many mistakes.

Deciding when to use passives is very important: they work better when markets are generally cheap, but are not so effective when markets are fully valued as you end up buying the expensive stocks as well as the cheap ones. Smaller companies lend themselves perfectly to regional active managers, where their skills can identify opportunities missed by the wider market.

When building a portfolio it is important to set out how much you want invested in each area and asset class. As a UK resident you should have a bias towards the home market as there are additional risks to putting money outside the UK, such as currency and regulatory risks. How much you have in equities depends entirely on your attitude to risk: the more risk you are willing to take, the more exposure to equities you should be able tolerate.

Your portfolio has four global funds. Lindsell Train Global Equity and Fundsmith Equity (GB00B41YBW71)* do a very similar job: the managers have a similar process and performance of both is excellent. I would pick just one of these.

As you have just started investing, I have taken this opportunity to construct a portfolio that will need very little maintenance over the next few years and can be added to once it gets to a sufficient size. The best way to start is to gather a few core funds from which you can grow the portfolio and invest. To add diversification, you can initially use tracker funds in areas such as Asia, emerging markets and Europe.

*IC Top 100 Fund