Thursday, 14 May 2015

A Logical Investment Strategy

Over recent weeks, I have been reviewing my investment strategy. When I first started this blog in Feb 2013, I wrote a number of articles which reflected my basic approach to the investing process. These are essentially a collection of guidelines which will benefit most investors - keep costs low, keep it simple, a diversified portfolio, start early etc.


These basic principles of investing gain traction because they produce a good result when used over a longer period and also because they make sense to most reasonable investors.

* Low Costs - it seems to be logical that if you invest in a fund charging 1.5% p.a., it is likely you will get less return for your investment than a fund charging 0.25% - this is hardly rocket science. Indeed all the research I have seen in recent years supports this. Here’s a link to a recent report by vanguard which is typical of many.

* A diverse portfolio - We all like to make a little extra money - but if you are anything like me, you hate losing money even more. The best investment strategy of all is the one that guarantees never to lose money - only one problem, such a strategy has yet to be devised.

The next best option therefore would be to limit any potential loss by selecting a diverse range of investments. As we probably all understand, as a general rule, its not a good idea to put all your eggs in one basket.

Investors can diversify their portfolio in several ways but the most common would be :

  • Holding funds or investment trusts rather than a few individual shares;

  • Diversifying assets between different classes - equities, bonds, property etc.,

  • Geographic - a global spread of holdings. As can be seen from the chart - courtesy of Novel Investor, limiting your portfolio to just one country may not have provided the better returns - far better then to have a wide global mix (NB USA not included).

(click to enlarge)

* Keep it simple - “Everything should be made as simple as possible - but not simpler”  Albert Einstein.

As it is an option to hold a wide variety of diversified assets in a low cost tracker, why would you want to hold the same assets in 10 different funds?

Vanguard founder John Bogle says “Simplicity is the master key to financial success. When there are multiple solutions to a problem, choose the simplest one.”

* Start Early and stick with it for the long term - those who embrace the idea of investing, and I suspect this may well be a small percentage of the population, will come to it at different times. The earlier we can get going, the better as our investments will compound over time - also, the longer the period of investing, the better chances of a successful result.

The ability to see it through over the longer periods could well be the most challenging aspect of the investing process. Investing will usually involve some equities and these can be volatile - some investors, myself included, can become irrational during periods of market volatility. Asset allocation and rebalancing is an important part of the strategy to deal with this aspect.

Apply the Logic

I hold quite a diverse portfolio :-
20 or so individual shares,
a dozen or so investment trusts,
some PIBS and other fixed interest holdings, and
some UK income and global income tracker funds/etfs.

Lets look at each in turn in relation to the above logical basics :

Shares - 20 is probably a reasonable number to give some diversity and they are very low cost as apart from the dealing fee to purchase, there are no further ongoing costs charged by my broker.

Whether they could be regarded as simple for the average investor to research and monitor is debatable but for myself, as I get older, I recognise this has become more of a chore and I am starting to think I could do without the half-yearly perusal of the interim/final report etc. - not to mention the share price volatility. My shares in easyJet fell 10% this week after reporting its first interim profit for over a decade - logical or what!

Individual shares are probably the most volatile assets to hold in any portfolio - and the logical implications of this are that the emotional rollercoaster makes it more likely that some shares will be traded too frequently which in turn increases costs.

I can have access to a wider range of shares in collectives such as investment trusts and low cost trackers. This offers diversity and reduces volatility.

It can be quite fun to hold individual shares but from a logical point of view, I am struggling to justify a case for their retention.

* * *

Investment Trusts - they offer diversity both in the number of shares and other holdings in each trust but also give access to global markets. The costs vary, some are reasonably low at ~0.45% with the likes of City of London, others are nearer to 1.0%. As with shares, there are no additional platform costs with my broker for holding investment trusts.

I find them less volatile than individual shares however, they do use varying amounts of gearing and can trade at a premium or discount to their NAV so they are a little more complex. Against this is the advantage of their ability to pay a steadily rising income steam due to their being able to hold back excess income in reserves.

The fortune of the trust is dependent on the manager making consistently good calls - some appear to be reasonably competent and some a little more average.

I think, on balance, there is a logical case for holding a diverse basket of the lower cost trusts, particularly where the manager can demonstrate a consistently good performance relative to an appropriate benchmark over time.

* * *

Passives - it more or less goes without saying that these are all low cost. There are however some additional costs - 0.20% platform fees - for holding funds with AJ Bell Youinvest.

They are diversified, fairly simple to understand and implement - although with the funds you don’t quite know what quantity you have purchased and at what price until a couple of days later. Although I have not bought the fund yet for my own portfolio, the Vanguard LifeStrategy funds offer a diversified low cost one-stop strategy which could not be much simpler.

The income distributions are unpredictable as the fund or ETF merely pays out all the income received over the intervening period.

There can be little doubt, on most fronts, these are the most logical way to invest.


I am trying to take some of the complexity out of my strategy - make it more simple, reduce some costs and hopefully generate a little better returns.

I am wondering what response you might get from IBM’s Watson - surely one of the ultimate providers of logical solutions. I’m sure it can’t be too long before it will be possible to pose a simple investment question and the super-computer will come up with the very best logical strategy!

I feel sure Mr. Spock would suggest I dispose of my individual shares and possible some of the higher charging, lower performing investment trusts and divert the proceeds into one or two global index funds.

...but that's not logical Captain...

I probably need a little more time to consider the further changes to my investing strategy. It would however be good to simplify my investment portfolio a little more… as they say, slow & steady steps - provided they are heading in the right direction!

I wonder what Homer would do - probably have another beer!

Feel free to leave a comment if you have any thoughts.


  1. Nice post. You're right of course about getting in there early with investing and being able to hold on during the turbulent times. I have been lucky enough to get investing early but have not--yet--experienced the truly turbulent times such as the immediate post-financial crisis world. I hope that I am mentally set up and prepared for it. We won't know until it hits though!

    That is why I chiefly focus on dividends. By doing so, as long as the dividend cutting in my portfolio is not too extreme I should be able to weather the storm fairly well. I am thinking of moving into ITs a little more in the near future to bring in some geographical diversity. The North American IT is quite appealing in this regard.

    1. Thanks DD. Forewarned is forearmed as they say but until we have another market downturn, as you say, none of us quite know how we will deal with it - some will sail through, maybe using the opportunity to pick up some bargains for their portfolio. Others will become a bit gloomy and may decide to give up on their equities.

      Good luck with the move into ITs.

    2. That is the hope. Just sitting their conscientiously investing and reinvesting would be my ideal picture of myself. Will it be reality? We will see sometime no doubt!

      My current disaster plan would be to focus my investment of classic defensive sectors. That may make it easier for me to overrule any "run away" tendencies! Also, I would probably remove all access to any sort of data related to the market other than those companies in order not to terrify myself. Indeed, maybe I will set up a "disaster" watchlist before then so I only have to look at that!

      Thanks. I am quite looking forward to experimenting with ITs. As yet I have none. I only hold individual shares and a few ETFs.

  2. It would be so good if shares were risk free but then again the returns might be lower. I guess this is one reason why I only have a limited portfolio compared to seasoned investors like yourself. I have no funds at all but I should really be considering these as they can be lower risk than investing in an individual company

    1. Laura,

      I guess each investor has to weigh up the trade off between the potential for the higher returns from shares and back their own judgment compared to the judgment of the managed fund or the lower volatility more balanced funds like Vanguard LS60. Each individual will have their particular preference but may not quite know what system they are best emotionally equiped for over the long haul until they have some experience of a full investing cycle.

      Good luck with the journey and thanks for taking the time to comment.

  3. This is an excellent post for really focusing the mind on defining our own strategy. You explain the different "building blocks" very clearly.

    I have ITs, trackers and some actively managed funds (some of which are "left over" from before I started thinking properly about investing).

    My portfolio still needs a little work especially as I will be retiring soon and may need to take a little income from it to supplement my pension. This only goes to show that being prepared to review your strategy when required (as you are doing) needs to be part of the strategy itself.

    1. Thanks Cerridwen - positive feedback always welcome!

      I am always learning from the increasing numbers of bloggers - yourself included - who are sharing their experience and thoughts about their journey through the maze of personal finance and investments. As with many aspects of life, its more the journey rather than the destination which hold the fascination - as you say, remain open to the possibility of changing your strategy.

      Good luck in the lead-up to your retirement.