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Beginner seeks "right investment system"

This 33-year-old investor has been investing on whims, but now thinks she should focus on exchange-traded funds and investment trusts. Three experts give her top tips on developing an investment strategy.
Beginner seeks "right investment system"

Marj is 33 and has been investing for two-and-a-half years, but is still grappling with trying to find the right system of investment. She says: "My approach up to now has been fairly scattergun. I tend to either ignore or defer key decisions, or I invest on a whim.

"The more I read, the more I think that investing in low-cost exchange-traded funds (ETFs) and trackers is the way to go, in order to keep fees down, gain diversification and to achieve a portfolio that doesn't require too much monitoring.

"However, as the bulk of my investing will be as a regular saver, investment trusts might be a better route for me than ETFs.

Marj saves £200 a month into her individual savings account (Isa) and then invests that sum on a quarterly basis. She aims to supplement her company pension scheme and retire at age 63, plus access the Isa for any big life events such as a house purchase, wedding or redundancy.

She has accumulated a portfolio of 12 holdings, worth just over £20,000.

"I recently added Scottish Mortgage (SMT) and the iShares Japan GBP-hedged ETF (IJPH), and topped up the iShares MSCI Europe Ex-UK ETF (IEUX) that I was already invested in. In addition, I'm invested in an iShares FTSE 100 ETF (CUKX) and the HSBC FTSE 250 ETF (HMCX). All of these are relatively small amounts of £1,000 to £2,000," she says.

"A few months ago I sold off Air Partner (AIP) when things looked a bit shaky, although I still made a modest profit. I also sold off the purchase cost of my investment in Trifast (TRI) and have left the remainder - albeit a small sum - to run on for further profit.

"Part of my rationale for playing around like this with relatively small sums is to get a feel for the emotional side of investing, practising the discipline of cashing out when a share shows a decent percentage gain and not being greedy."

Reader Portfolio
Marj 33

Individual savings account


Supplement pension and pay for big life events



Trifast (TRI)£8124
Red Emperor (RMP)£8234
Henry Boot (BHY)£8854
Greenko Group (GKO)£9935
iShares MSCI Japan GBP Hedged UCITS ETF (IJPH)£1,1486
Partnership Assurance (PA.)£1,3937
Bovis Homes (BVS)£1,7578
Scottish Mortgage Investment Trust (SMT)£1,96910
iShares MSCI Europe Ex-UK UCITS ETF (IEUX)£2,14910
iShares FTSE 100 UCITS ETF (CUKX)£2,47912
Fidelity China Special Situations (FCSS)£5,00024

Source: Investors Chronicle



Chris Dillow, the Investors Chronicle's economist, says:

You have the right idea. Investing a regular monthly amount is a good thing, for two reasons.

One is that it is a disciplining device: it gets you into the habit of saving. If you try to make ad hoc investments, you'll often be tempted to spend the money instead and so you'll end up saving less. You are not alone in deferring investment decisions. A regular direct debit stops you doing so. This matters because, within reason, how much you invest matters more in the long run than what you actually invest in.

Secondly, regular savings mean you benefit from pound-cost averaging: if you buy £200 of shares each month, you will buy more shares when prices are low. You are therefore buying on dips. And this should pay off over the long run unless we fall into Japanese-style lost decades in which the market sags for many years.

£200 per month might not seem much to some readers. But over 30 years, if invested in equities and if we can get a 5 per cent real return (slightly less than the historic average), it could easily accumulate to over £150,000 by the time you get to 63.

You are, however, also right to see a problem with investing in ETFs. If you're investing relatively small amounts each month, brokers' charges can mean that you lose the main benefit of ETFs, which is their low cost.

This doesn't mean you must sacrifice the benefits of passive investing, though. You can make regular savings into unit trust trackers or into the Aberdeen UK Tracker Trust (EUK), which has a minimum monthly investment of £100. These should be the core of your investments - not least because they allow you to buy and forget (you are right to want a portfolio that doesn't require much monitoring, not least because once you have your asset allocation right there is a strong case for doing nothing).

I admire your honesty, in saying that you have in the past invested on whims. As you've learned, this can be dangerous - not least because it tempts one into sexy but misleading growth stories like those ill-starred Aim stocks; remember that glamorous growth stocks, and especially those offering the possibility of very big gains, tend to underperform over the longer run.

One way to correct these whims is to have some prejudices - or Bayesian priors - about which types of stocks are more likely to outperform. History and international evidence tells us that there are three types that tend (on average and over the long run) to do so. These are: defensives, value and momentum. In this sense, though, you might be missing out. You say you've practised the discipline of cashing out after decent gains. But doing so might deprive you of the benefits of momentum. By all means sell a share if you have good reason to think it overvalued - but don't sell merely because you've made a profit.


David Liddell, founder of online investment advisory service IpsoFacto Investor, says:

You seem to be thinking very much on the right lines; regular saving into some solid investment trusts is a great way to build up a capital sum. So, taking the current £200 a month, if possible set up a regular monthly trading mandate, providing the charges don't make it too uneconomic; most good Isa providers should offer this service at reasonable rates. This means that the investment timing decision is taken out of your hands (it is a lot less stressful!) and you take advantage of the wonders of pound-cost averaging; buying more of an investment when it is cheap and less when it is more expensive.

As regards the existing investments, if you are thinking of, for example, buying a house in the next few years, that would suggest a more conservative approach than if you were just saving for retirement.


Helal Miah, investment research analyst at The Share Centre, says:

Your strategy of letting your £200 a month build up and then investing every quarter makes sense when considering standard minimum dealing commissions. However, some brokers, including The Share Centre, offer even smaller commission rates for regular monthly investments of 0.5 per cent or a minimum of £1 for regular monthly investors. This will bring your effective commission rates down significantly and will help smooth the timing of your investments and take advantage of short-term dips in the market.

For your investment strategy, investment trusts may not necessarily be a better option than ETFs. Investment trusts are often comparable in terms of management fees versus unit trusts or Oeics, whereas ETFs are generally perceived as lower cost since a large portion of them are index trackers. They also benefit from being free of stamp duty upon purchase, unlike most investment trusts. However, the discount yield on investment trusts should not be dismissed, especially for longer-term investors.



Mr Dillow says:

I applaud the fact that you’re making big pension contributions: doing so from a young age should enable you to build a big pot. However, check out precisely what the scheme is investing in: it should be low-cost global tracker funds alongside cash and perhaps bonds.

Mr Liddell says:

You are taking maximum advantage of your company pension scheme, which is good. Two issues arise; keep an eye on how it is invested, so don’t have too much similar exposure in your own investments. Also, you might want to consult as to whether your regular saving might go into a Sipp, where you would obtain tax relief from the government.



Mr Liddell says:

Putting £100 a month in to two old investment trust staples - Temple Bar (TMPL) and Foreign & Colonial Investment Trust (FRCL), both large reasonably liquid stocks, would give some solid exposure to a value-based portfolio in the case of Temple Bar and some international holdings in the case of F&C. Don't forget to reinvest the income as well, and you should build up a good capital sum over the years. Obviously, if you can start saving more out of your income as it increases, that would be good.

Taking the list of investments as presented, the biggest holding is Fidelity China Special Situations (FCSS). As a long-term investment, I do like this and wouldn't be put off by the current volatility.

Elsewhere you have got some interesting investments in the small-cap arena, but the standard advice from the boring financial advisory community would be to sell these and invest in an investment trust or ETF instead. For straight small-cap exposure, the Henderson Smaller Companies Investment Trust (HSL) has an excellent long-term record. If you want to maintain some green exposure, consider John Laing Environmental Assets (JLEN), which invests in wind and solar power. On the other hand, if you enjoy looking at companies, there is no harm in setting aside a small proportion of your assets to have some fun with.

In our view it may be the time to take the Sterling hedge off Japan exposure – Vanguard FTSE Japan UCITS ETF (VJPN) could replace iShares MSCI Japan GBP Hedged UCITS ETF (IJPH). In general, with markets looking a bit rocky at the moment, if you have got a really long term time horizon, then do use weakness to invest further. Add to iShares Core FTSE 100 UCITS ETF (CUKX) and iShares MSCI Europe Ex-UK UCITS ETF (IEUX) if you can, for example, and you may want to include some US exposure (as a small percentage). North American Income Trust (EUS) is standing at a reasonable discount at the moment. But you should probably have at least half of your equity investments in the UK; the FTSE 100 is arguably one of the cheapest markets at the moment.


Mr Miah says:

For a beginner investor, overall you have a good approach and I find it difficult to be critical. You have a focus on collectives, using ETFs and investment trusts as the core of your portfolio, which gives you good diversification and relatively low risk. However, an area you could seek more exposure to is North America. We believe that despite the imminent interest rate increase, the US (and to a lesser extent the UK) will still be the economy that pulls the rest of the world out of this slow-growth environment.

You said that you have made some bad decisions on Aim resource companies. I think it is sometimes a good thing to get burnt by your investment decisions early on, it helps form realistic expectations and understand risk. It is the time when you can afford to lose big on your investments, and as you are young, you still have plenty of time to build your retirement portfolio.

The sell-off in China can be a little worrying, but we would be happy sticking with Fidelity China Special Situations. It may be worth spreading your emerging market exposure a little more broadly in a fund that invests in other countries.

When looking at this portfolio alone, I would say that you have more than adequate exposure to higher-risk small-cap stocks and I think it is reasonable to also look at some mid-cap or large-cap stocks to complement your core portfolio.