I'm a DIY investor in my 20s: the mistakes and lessons I have learnt
As an investment journalist I felt it was important to align my interests with those of readers; but along the way I've learnt some lessons that novice investors all too often make.
It is worth pointing out that I am at an advantage compared to other first-timers, given that my day job is to write about investment and this involves regularly speaking to and reading the views of professional investors.
Note: funds with a star* are Moneywise First 50 funds.
How I have fared so far
Three years on from my first foray into the world of investment, my portfolio (which contains four funds and an investment trust) is up 30%.
Over the same time period the FTSE All Share is up 15%, while the FTSE 100 has gained 13% (after dividends have been reinvested).
But the FTSE World ex UK index has fared much better, up 40%. If I had pumped all my money into a cheap global tracker fund three years ago, my Isa would be bigger today. Hindsight is a wonderful thing.
However, my thinking three years ago was that, by definition, global tracker funds have a big weighting to the US stock market, around 55%. It is starting to become a bit of a tired argument, but three years ago the US stock market looked expensive and today it looks even more so.
I have no idea, and neither do any of the professionals, whether or when this will lead to a stock market correction, but I would sooner 'buy low' rather than 'buy high'.
With this in mind I decided to allocate a third of my Isa to the emerging markets. The two funds I picked - Stewart Investors Asia Pacific Leaders* and Aberdeen Global Asian Smaller Companies - have both served me well.
I have to admit I was pretty lucky in terms of timing: three years ago emerging markets were deeply out of favour, but in 2016 they have returned to form.
I am young and investing for the long term, so have time on my side to ride out the inevitable volatility that comes with investing in these less economically mature economies, in pursuit of higher returns.
The mistakes I have made and lessons learnt
As an investment journalist I really should be practising everything I preach, but one thing I have not been very good at is rebalancing - which involves selling the winners and topping up investments that have underperformed.
Fundsmith Equity, for example, has been the strongest performer in my Isa and as a result has become a much bigger percentage of my overall portfolio.
Therefore, in theory I should perhaps have rebalanced at the start of this year and put the proceeds into the two emerging market funds, which had unperformed my other investments.
But I didn't, and I still haven't taken any profits. One of the mistakes a DIY investor commonly makes is running winners for far too long, and I am fully aware that not taking profits will in an all likelihood come back to haunt me at some point - but my thinking is that despite the strong performance my portfolio is not overly exposed to Fundsmith Equity, so for the time being I am not going do anything.
If I had invested in something specialist, say a biotech fund for example, I would not have hesitated to rebalance.
But the biggest mistake I have made is investing in something I didn't fully understand, which taught me to stick to investments that I understand thoroughly. I viewed the investment (a hedge fund available to retail investors) as a bit of a punt, so thankfully didn't end losing my shirt.
At the time I should have followed the wise words of Peter Lynch, who ran the successful Fidelity Magellan fund. Lynch's advice to investors was to "invest in what you know".
Other mistakes DIY investors make include obsessing over short-term performance, which can lead to unnecessary tinkering. Another common error is buying whatever is fashionable.
First time investor? Get in touch
If you have a question about where to put your money, you can get in touch with the investment doctor. Simply write to firstname.lastname@example.org.
This article was originally written for our sister magazine, Money Observer.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.