How to be a better investor: a beginner's guide
A dozen or more years ago, I would occasionally be invited onto a financial television channel and, if my fellow guests ever paused for breath from raving about the latest 'must-own' stock, I would be asked how viewers might become better investors.
Unfortunately - if only for any dreams I harboured of becoming a TV pundit - the answer to that question does not change on a daily basis.
'Have a plan,' I would always say. 'Know your goals, time frame and tolerance for risk. Think long term, diversify your portfolio and pay attention to costs. Oh - and don't believe everything the media says.' All very sensible stuff but hardly gripping telly, and the invitations soon dried up.
But there are simple things both newcomers and seasoned investors can do to ensure a portfolio is sensibly structured, risk is contained and costs are kept to a minimum - all of which should help to enhance returns over the longer term.
RISK AND REWARD
Let's start with what Jason Butler describes as the most important consideration. 'Know why you are investing,' says the founder of wealth manager Bloomsbury Wealth and author of The Financial Times Guide to Wealth Management.
'Have the context and clarity of a well-structured financial plan that takes into account why you are investing, how best to achieve your life goals and the risks that are most likely to be compensated in the form of long-term investment returns.'
This view is echoed by Nick Hungerford, chief executive of online investment management company Nutmeg, who underlines the importance of investors understanding and then balancing risk and reward.
'You need to feel comfortable with the level of risk you are taking in return for the possible gains you hope to see,' he explains.
'Have a goal in mind - are you saving for retirement, say, your child's education or a rainy day? How much do you want to accumulate and how bumpy a ride are you prepared to take as the financial markets inevitably ebb and flow? This is when you need to stay disciplined and focused on your long-term goal.'
The importance of a long-term approach to investing is hard to overstate. 'Market fluctuations are a feature of investing,' says Gavin Haynes, managing director at wealth manager Whitechurch Securities.
'I have yet to meet anyone who has consistently made money by timing the markets correctly over the short term. Successful investing is largely driven by holding a blend of quality investments for the long term.'
In that context, 'blend' is a deceptively simple term, as it effectively encompasses the key investment disciplines of asset allocation and diversification.
According to Jason Hollands, managing director of communications at financial planning firm Tilney Bestinvest, a common mistake among those who manage their own investments is making ad hoc decisions as they go along.
'Unfortunately this often results in choosing whatever investments are currently in fashion,' he warns. 'Over time, people can end up building a museum of yesterday's "best ideas" rather than a well-planned portfolio with an overall strategy. Their collection of investments can become unnecessarily risky and cumbersome to monitor.'
This problem is exacerbated by a tendency for financial services businesses to focus heavily on individual fund ideas, while offering little or no information to help investors decide on an appropriate asset allocation strategy - how they should best slice up their investment cake between equities, bonds, property, alternatives, cash and so forth.
When it comes to diversification, Haynes believes a portfolio that concentrates on only a few investments is likely to fail in its objectives. 'Whether you have a cautious or a speculative attitude to risk, ensure your portfolio is diversified in the investments it holds,' he says. 'Finding the right balance will depend on your needs and risk appetite.'
Both Haynes and Hollands pick 20 as a sensible upper limit of holdings for fund-based investors. 'This way, the next time you want to invest in something new, you are forced to decide which fund to sell to make room,' says Hollands. 'You go through an almost Darwinian process where every fund must fight to survive in your portfolio.'
Once you have your spread of investments sorted, your work is not over. 'Periodically review your portfolio - at least annually - and if necessary, rebalance it,' adds Hollands.
'Not only will this ensure it continues to meet your risk profile and goals, it will also force you to take profits in markets that have risen sharply and reinvest in areas that may now offer better value.'
COSTS AND VALUE
Like it or not, costs are a fact of investment life. One small plus point, however, is that this is an area where you can exercise some genuine control, so there is little excuse for not being fully on top of what you are being charged for owning your investments.
'Hidden costs and commissions can scupper your financial dreams,' warns Hungerford, 'so know exactly what you are likely to be paying in charges before you commit.'
When buying funds, the key number to note is the 'ongoing charges figure' (OCF), which represents the total cost of owning a fund, including the annual management charge and other recurring expenses, and is intended to make it easier to compare costs.
If you hold investments on a platform, there will be a fee attached for administering your portfolio and you should also check whether there are additional transaction costs when buying and selling investments.
'A wealth manager or adviser ought to provide clients with a monetary figure for the total cost of investing,' says Haynes. 'DIY investors will need to calculate the costs themselves and then decide the most cost-effective way to proceed.'
The financial services sector can often tie itself in knots with the idea that cost is a more important consideration than value - that cheapness is in itself a virtue. Nowhere is this more evident than in the debate over whether it is best to invest in cheaper index-tracking funds or actively managed portfolios that cost more but are not guaranteed to outperform.
'The cheapest option is not always best, but an optimum portfolio can invest in a mix of both,' says Haynes. 'I will only pay higher management fees for those investment strategies that genuinely have the potential to deliver higher risk-adjusted returns and for exposure to areas that passive funds cannot access, such as commercial property or absolute return.'
With the vexed issue of costs and value explained, we will end this review of ways to become a better investor on an upfront note and where we began - with an observation from Butler.
'The media is not designed to help you to make good financial decisions,' he warns. 'It focuses on what personal finance professionals call "noise", in the form of negative stories or sensationalist "get rich quick" ideas, because they are newsworthy. Remember that when forming your opinions about money.'
Still, in the interests of balance, it is worth pointing out that monthly personal finance magazines, and certainly Money Observer, are about as far removed from 'noise' as it is possible to find in the media these days - and certainly compared with a TV show pushing the latest stocks du jour.