Investment strategy for novice investor

savingforoz

I'd appreciate any views as to whether I am on the right track regarding investments. (I am a novice but doing my best to learn fast).

I am 45 and aiming to invest for a comfortable retirement. As my user name says, I am saving for Australia, and the financial requirements for retirees mean that I either need a high capital sum, or a lower sum plus an income. I have decided to aim for the latter, which at present stands at a capital sum of £150,000 plus annual income of £22,000.

At present I am due to get pensions, including the State pension, of c£10,000 at age 60, so I am aiming to plug the income gap of £12,000. The capital sum should be taken care of by the sale value of my house.

To do this, I am planning to:
Double my pension contributions to £200 per month
Invest say £1,250 per month in higher risk funds for the next 10 years, then after 55 start switching to lower risk investment vehicles.
I am planning to use up my £7,000 maxi ISA allowance each year and the balance to go into creating a high yield portfolio of blue chip shares, with the dividends being reinvested.

My aim is to create a large enough fund to generate the income that I require.

I have started by putting money into a Global Emerging Markets funds (2005/06 ISA), and was thinking of splitting this year's maxi ISA between corporate property, a global growth fund and a UK growth fund, or perhaps a European emerging markets fund.

Does this sound like a reasonable approach? My main concern is regarding my attitude to risk - I can see the sense of going high risk initially to get my funds growing, but do wonder whether, as a novice, I might get a severe case of regret/cold feet if/when the current favourable market for investors takes a turn for the worse.

Thank you for your time.

moneytroll

"My only concern is regarding my attitude to risk - I can see the sense of going high risk initially to get my funds growing, but do wonder whether, as a novice, I might get a severe case of regret/cold feet if/when the current favourite market for investors takes a turn for the worse."

From what I gathered (I am a novice too), there's not much point in trying to time the markets (ie, because Emerging markets are doing well right now, invest in those for these reasons.) In fact, I would do the opposite to achieve steady gowth. I would set yourself an asset allocation for different sectors (in percentage terms) according to your risk profile and stick to it, no matter what market conditions. The psychology is such that when a sector is doing well for a prolonged period of time, people tend to think that it's going to go on forever. But there will always be market corrections when you least expect them (especially after a sector did well for a prolonged period of time, like it has been the case with Emerging markets). The art is to stick to your original asset allocation rather than investing in higher risk funds "initially" (whether you get cold feet or not) as over long term, one ought to still do well with equities and proper allocation. (But checking that it's the sector that's not doing well rather than the fund...)

al_yrpal

savingforoz

I regularly swop funds, and reckon to double my money every two years. This is my guru http://www.trustnet.com/ut/funds/sectors.asp?sort=3&ss=0&sec=a&type=ima It show me what fund sectors are doing, and which fund sector to be in. Being in the right sector IMO reduces risk and is the key to successful momentum investment. Dealing with riskier funds like you are describing, you need to look at things briefly every week, more closely every month, and swop funds if necessary every three months.

I do not worry about things like asset alocation, but I do try to spread my investments to reduce risk. For three years now my strategy of changing to the fastest horse has worked well, but we have been in a rising market. I also keep a general eye on the newspapers. This allowed me to ride the oil slick and add in a commodity fund that has done very well, and get out during the recent Asian glitch caused by Livedoor. Investor sentiment is much more important than asset alocation.

I like your strategy, who knows if Prudential or Scottish Widows will exist in 20 years. Will PM Brown downgrade pensions for well off southerners - probably!

savingforoz

Thanks guys. I have also found the Trustnet site and can see that from now on it will get regular use; it has already helped me a great deal. I was also wondering how often to review my investments, so Al_yrpal's comments about that were useful - they were in line with what I was thinking, to make sure I'm on track. My feeling is that Global Emerging Markets still have a way to go yet, so I'm happy with that original choice, and when I feel that sector has run its course, then I'll switch funds.

Am planning to read Fundology and look at the Inacdemy site to learn more. I think that, with regular and active reviewing of matters, continued learning and a diversified portfolio, then I'll be doing the best I can. We'll see what happens.

moneytroll

"For three years now my strategy of changing to the fastest horse has worked well, but we have been in a rising market."

That's not really long-term though. Also, while we had rising markets, momentum investing might have worked well (as al said), but that way, you will never have the chance to start 'riding a wave' from the very bottom when you can make the most gains! Instead, you will get the left-overs and the risk is high that by being overweight in a particular sector, you'll get your fingers burned eventually...If you double your money every 2 years, but at some point lose 70%, I am not sure it's worth the hassle of constantly reviewing/trying to predict tendencies that are impossible to predict + worry if you are following the right trend (markets are mostly efficient - when people have spotted a trend it's usually too late to join it in order to make sensible profits). What shoots up, always has to come down (and vice versa).

The contrarian strategy I am trying to adapt is a more conservative one (by having a diversified portfolio within my asset allocations) and requires reviewing/rebalancing every 6-12 months etc while you can go on worrying about other things in life.

moneytroll

PS: that's not to say that one 'behaviouralist' strategy completely excludes another 'contrarian' one. You can still allocate yourself a certain percentage of your total assets to specialist sectors (single countries or specialist sectors) and place your 'bets' where you think is most appropriate at the time after taking an informed decision. But if it's the majority of your assets, you have to be aware of the risks! How much volatility can you bear?

savingforoz

Thanks Moneytroll - are there any good websites where I can find out about contrarian investing? Have heard the term but know nothing else.

Would you say an alternative approach would be to do what Motley Fool recommend and find a decent tracker or trackers and just invest monthly for the long term? They recommend it highly but my feeling is that I'd prefer to take a more hands on approach and be more active. But then if trackers outperform or at least keep pace with the market, perhaps there's little point. You can see I'm still new at this!

cheerfulcat

savingforoz, you might find these articles on the Motley Fool site interesting too.

moneytroll

I think the Malkiel's book 'Random Walk Down Wall St' is a great intro to any novice.
(It refers to US stockmaret mostly, but the universal principles would apply anywhere. It also explains a lot about 'bahaviouralists'/'fundamentalists' etc and it's a fun read too.) Though he also goes on about trackers (but mostly for the sake of illustrating statistics rather than recommendations), I wouldn't have too many in my portfolio. (In fact, i don't have any at all as i find them boring.)
With a more 'hands-on approach' funds are generally a better start IMO + there will be talented managers which can and do beat the markets (even though there are more funds that don't), whereas trackers are guaranteed to deliver average 'mediocrity' all the time ragardless ;-) (they are also not very precise at tracking the index btw)
The other end of the spectrum is the book Fundology but be careful as it's written by the guy who runs Jupiter Fund of Funds and it's inevitably advertising it to some extent (these are for investors who don't want to bother with researching funds/managers etc and therefore cost more).
For portfolio construction according to one's risk profile, I just posted this site on the other thread: http://www.bestinvest.com/planning/portplan/index.htm
it has also useful guides. assesing your risk profile rightly will help you getting rid of the 'cold feet' symptoms if it should come to rapid market declines...
good luck

dunstonh

Would you say an alternative approach would be to do what Motley Fool recommend and find a decent tracker or trackers and just invest monthly for the long term? They recommend it highly but my feeling is that I'd prefer to take a more hands on approach and be more active. But then if trackers outperform or at least keep pace with the market, perhaps there's little point. You can see I'm still new at this!

You mean the article that recommended the FTSE100 trackers in the past? The same FTSE100 trackers that have made virtually nothing over the last 5 years?

Trackers have their place and can easily form part of any portfolio. However, you should look to where you want to invest your "spread" of sectors and then pick the funds you feel are appropriate, whether they be tracker or otherwise.

moneytroll

btw, if you buy into funds, IMO (this is not advice!) it's better to buy when they (or their indices that thay are compared to) are experiencing a short-term (but you never know if it's short-term) dip (if you have a lump sum to invest), or do the 'pound cost averaging' over several months (if you have monthly amounts sums coming in) to avoid buying right at the top of the fund's performance.