I have just read a very informative and well written article on the subject of D.I.Y. investing for your ISA and SIPP. It was produced and published by Hargreaves Lansdown the largest Fund Supermarket platform in the United Kingdom. The article was broken down into four sections. I have précised these as follows:
- Focus on the future, not just the past….Assessing which investments are likely to perform well in the future is much harder than looking at which have done well in the past -nobody has a crystal ball. However a detailed analysis can separate the element of returns which are attributable to luck and which are to judgement.
- Diversify your investments……..Different areas perform well at different times.(Think Emerging Markets) Diversifying maximises the potential for long term returns but investors who focus on one particular area will only be right some of the time.
- Do not take unnecessary risks…..It is essential to look at the volatility of an investment as well as the potential returns. On occasion two funds may have similar returns but one is more volatile. So from a risk reward perspective you should choose the less volatile fund.
- Do not ignore the impact of costs…..If you pay lower charges your investments will be worth more. That would seem to be pretty obvious, but remember that sometimes there can be a trade off between cost and quality. The simplest course of action for your ISA and SIPP trades must be to use a supermarket platform where most of the costs have been removed.
The article then goes on to say that there are over 2500 funds to consider when making your investment choices, and thirty two different IMA sectors. Reading this a person considering taking up looking after their own fund choices must be rocked back onto their heels, that`s if they have not already made for the door! However, wait, rescue is at hand. Hargreaves Lansdown say that they have done this work for you and have come up with their own “Wealth 150” funds. They point out that they have a thirteen strong research team that use complex mathematical models to help them make these decisions. So you may well say job done. They are advocating that by selecting from this list and taking a passive long term approach to your investment then these funds and their managers will give you a better than average return. This may be so but I believe it will not give you the best return which must come from being an active rather than a passive investor.
Hargreaves have already made the point earlier that it is important to be in a sector that is growing and that all sectors are not in favour at the same time. They also make the point that trading on their platform is cheap if not free. So all you need is up to the minute sector and fund performance numbers and then to be active and you do not need to be in a non performing sector. These numbers are available from the Saltydog Investor. Now although I recognise the merits of the Wealth150 funds, frequently there are new kids on the block and these Managers can absolutely eclipse the established funds performance. The obvious question is why would you not want to have some of your money invested with them whilst they are producing the better returns. To me this is all a no brainer.
If I was a cynical person I might think that Hargreaves Lansdown and the other platforms would like us to be on their platforms but not trading. Then there would be less administrative and transaction costs to erode the money they receive from the Fund Managers for holding the funds on their platform. Also the Fund Managers would like a quiet life where they can sit on a steady amount of investor’s money which does not fall when they do not perform. Perhaps that is why they don’t want you to be an active investor. Still, with the advent of RDR this is going to change as the public becomes more and more familiar with Internet trading and goes it alone with numbers and information that removes the “Old Guards” disinformation programme. Perhaps then more money may stay with the investor and less will move to support football and rugby clubs.
Last week the Telegraph published an article which reported on the movement of the S&P 500 around the times of the last twelve conflicts which occurred during the last thirty years. The original research was carried out by the Deutsche Bank. The conclusions are quite startling and could possibly give an active momentum trader like a Saltydog subscriber a lucrative trend to follow.
The research started with the missile strike on Libya in 1986 and concluded with the Iraq war in 2003. In all twelve conflicts the starting point was the date that America entered the conflict. They then looked for the highest market point in the three months preceding the strike date, the rate at the strike point date and the markets position one month after the strike date. In all twelve cases the market on strike date was below the high point in the previous three months although the drop was varied from Bosnia(1%) up to Afghanistan2001(15%). After the strike date the S&P rose in all cases with the Gulf War 1991 showing the highest rise of 18% but the average rise over all the conflicts was 7%. This type of stock market movement was summed up by Nathan Rothschild in 1815 who is said to have coined the maxim “Buy on the sound of cannons, sell on the sound of trumpets.”
So the question we have to ask ourselves is whether the conflict in Syria falls into the category above. After all the Americans have not fired a missile and Obama and Putin going face to face is not exactly a conflict. Still the use of Poison Gas munitions and the one hundred thousand dead in Syria obviously makes Syria a serious conflict. However even though it has looked for the last few months that the Americans were certainly going to get involved, it has not happened and now it looks less likely to happen. So it is far from a certainty that this conflict will make the markets perform in a similar fashion to the twelve conflicts which were analysed by the Deutsche Bank.
Naturally the last thing we would wish for would be to profit from further suffering, however the markets may still follow the pattern above without further American involvement and if they do, then this is possibly the time to be fully invested in the market. This is the time to follow the Saltydog numbers and see which way the markets move and which sectors move forward. Now is the time to be watching the graphs and be prepared to be active with your investments. As a Saltydog subscriber you can watch the movement of the funds on a weekly basis, not for you the wait for your IFA to call an annual meeting long after the event when the opportunity has passed.
I have used the above title for this article because glitter for me represents the financial press. Not all of the press but certainly as far as I am concerned, a large percentage falls into this category. Too many times one can discern that one article is simply a re-write of other journalist’s efforts and this snowballs until the casual reader believes that if so many writers have this same opinion then it must be true. However as the song goes “It aint necessarily so”. It is important to establish from your own research and reading which journalists and publications can be trusted for their commentaries. This is a matter of time and experience and experience will always be the steady dividend payer in the game of investment.
Experience will show you how to profit from variations from the probable. For example we all know that all funds do not move one way together but that all funds in a certain group will move up together in certain markets and down together in other market conditions. It does not take the might of the financial press to flood us with this information, but yet it does. This is what I call “glitter” and you should learn how to filter this noise out. What we would like to know is when a fund does not perform in the same manner as its group members. Especially if it is an out- performance. An example of that in the last year might be the Legg Mason Japanese equity fund which out-performed even the good performances of the rest of the Japanese Equity fund group. It would have been nice to see a reasoned article, early in this success story, and not in a blizzard of paper after the event.
A person can have great mathematical ability and unusual powers of accurate observation and yet fail with his investments unless he also possesses the experience and the memory. Then, like the physician who keeps up with the advances of medical science, the wise investor never ceases to study general conditions that are likely to affect or influence the course of the markets. Today this condition would be the troubles in the Middle East and in particular Syria. Therefore it is necessary for the investor to build up a portfolio of writers and journalists who do not “glitter” but instead, offer reasoned and researched opinions that you can trust. Good luck with that.