Investment strategy for novice investor

savingforoz

Thanks to everyone for their helpful replies. Dunstonh has, as usual, made very pertinent comments, and helped to clarify my feeling that perhaps trackers aren't the way to go for me, and that just doing what the Motley Fool says could be...well, foolish! I prefer the idea of being more proactive with my investments.

The bestinvest portfolio planning tool looks good and I'll definitely give it a go. Once I have clarified in my mind what my strategy should be, and sorted out how I'll approach dips/downturns in the market, both financially and psychologically, then I'll be ready to go.

al_yrpal

moneytroll wrote:

"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).

No its not long term, thats the whole point. If you mean by long term 'invest and forget' that's a recipe for disaster, as followed by the herd who got severely burnt in the dot com boom.
You can't be a lazy investor and get an above average return, thats why you look every day, every week and every month and swop investments, often at a day's notice like the livedoor crisis - a great moneymaking opportunity. I think thats what savingforoz was asking about? I have been doing my strategy for 3 years now, after getting pretty average returns on more conventional strategies for many years. Its no hassle at all and as my part time job its very rewarding.
I prefer to back my own observations and judgements rather than slavishly follow things like Bestinvest or similar. That way you are not one of the herd, thus hopefully avoiding herd type mistakes.

Momentum investing can be a risky strategy, its not for everyone. You have to take precautions and lessen risks as I have outlined. If you want a quiet life adopt strategies like buying a tracker, income fund or HYP.

BTW I have never experienced anything like a 70% instant loss - have you?

moneytroll

It all depends...
It doesn't have to be so black&white, that's for sure.

"No its not long term, thats the whole point. If you mean by long term 'invest and forget' that's a recipe for disaster"

By longterm, I mean having your money in equities for a long time, not in a particular fund. I stick with my customized asset allocation, but change funds/rebalance when necessary (every 6 months or so). that means that if a sector is doing badly, I top it up if I feel it's appropriate, complying with the original asset allocation (It's completely counterintuitive, requires a lot of discipline, even a bit of bravery in particular bad moments and might not make sense to many novices. But because markets don't make sense - otherwise everybody would make money from it and therefore the profiting opportunities would self-destruct - it works very well indeed). That's my strategy and I am not saying it is a better one (it's nice that we can exchange views/experiences etc).

"followed by the herd who got severely burnt in the dot com boom."

something i don't quite understand: if you use the trustnet's ranking system (as you mentioned earlier), you inevitably are 'following the herd'. you look at the last 3 month's performance (oh, the beauty of hindsight!), missing the most important part of gains (which are in the past), and switch, speculating that the good times will continue to take place. it is extremely hard (and in many studies proven as impossible) to time the markets as to prove that it's not due to randomness... information travels too fast. (+ we are not talking about trading shares btw, it's funds ran by managers; they mostly do invest for the very long term in any case. short-term dips are unavoidable and short-term rises unpredictable etc.)

"You can't be a lazy investor and get an above average return"

Contrarian method is not to do with laziness at all, IMO, just a bit of common sense.

"If you want a quiet life adopt strategies like buying a tracker, income fund or HYP."

Again, not quite right. For more excitement, just choose a riskier profile.
Momentum investment is not for everybody i do agree with that. It's a lot of work and (super)high-maintenance and the question arises whether it's worth is (not after 3-4 years, but after 5,10,20 years).

"BTW I have never experienced anything like a 70% instant loss - have you?"

If you have only been doing it for 3 years (while markets were at their best, after the last crashette), I am not surprised there wasn't yet a loss of 70% (ok, I admit it's maybe a little extreme, but with momentum investing, not totally implausible as you have to check your funds every single day).

it's the fund managers who make most money from people who are into momentum investing...(and the contrarians of course :rolleyes:)

dunstonh

At the end of the day none of us has a clue where the best place is to invest and what funds are going to be best. Because of that, it is best to have a diverse portfolio of funds (assuming funds in this case) of varying risk which average out to match your personal risk profile. Then periodically rebalance them to bring them back in line with your risk profile.

moneytroll

Good summary, dh, though it's not to say that profitable opportunities do not arise from time to time. And correct me if i am wrong for feeling that IFAs are slightly more pessimistic or cynical about those opportunities arising in the first place than individual investors. :cool: (probably 'cos there's a protocoll to follow)

there are people who think that if a $100 note is lying around, it must be fake, otherwise it wouldn't be lying around in the first place - to paraphrase from Malkiel's book. But trouble is, if you never pick it up, you will never know whether it is fake, but one has to make sure not to drop everything else just for that one bill.

al_yrpal

moneytroll wrote:

It all depends...

it's the fund managers who make most money from people who are into momentum investing...(and the contrarians of course :rolleyes:)

They dont actually, if you invest through the discount broker recommended by Martin. All upfront fees are refunded and the annual fee is usually 1.25% per annum. And, if you are making large returns, the reamining fees are peanuts.

savingforoz

dunstonh wrote:

At the end of the day none of us has a clue where the best place is to invest and what funds are going to be best. Because of that, it is best to have a diverse portfolio of funds (assuming funds in this case) of varying risk which average out to match your personal risk profile. Then periodically rebalance them to bring them back in line with your risk profile.

That's a good way of thinking about it, in a nutshell - I am planning on diversifying things in my ISA this year, spreading things over about 4 - 5 different funds, using discount brokers as al_yrpal suggests. Once I start buying shares directly, they'll be in UK blue chips so the funds can be in something different (commercial property, European growth, special situations, whatever) which should balance things out. So the portfolio may be a bit unbalanced initially, but only in the short term.

EdInvestor

I find the HYP works a treat Also like commercial property funds and trusts for the lower risk side. Stick with big blue chip shares if you want to reduce risk - it's the smaller caps which tend to be unpredictable.Size matters.

For funds: the site below has a rating system for both fund managers and the funds themselves which is very useful in weeding out the comparatively few worthwhile ones from the large swathes of junk littering the landscape:

http://www.citywire.co.uk/Funds/Home.aspx

It's very important to pay very close attention to charges, always use discount IFAs and brokers, particularly with any fund purchases,or you just don't make any money worth a damn. And if you hold shares, leave them alone, resist the temptation to always be buying and selling. Don't reinvest your divis until they have mounted up to a level where it's cost effective to do so.Otherwise the costs will eat up your profits.

Impatience is the chief enemy of the successful investor.

moneyandmountains

al_yrpal wrote:

They dont actually, if you invest through the discount broker recommended by Martin. All upfront fees are refunded and the annual fee is usually 1.25% per annum. And, if you are making large returns, the reamining fees are peanuts.

I would disagree. I think you are referring to the portion of the charges that constitute the comission paid to the IFA. The fund managers charges are always going to be there. Typically, switching funds isn't too bad in a fund supermarket e.g. 0.25% in Fidelity Fundsnetwork

moneyandmountains

Use of the Trustnet ratings and historial performance data have been mentioned earlier.

One of the most useful parts of the Trustnet service, if you setup a portfolio, is that you can create email alerts on the price of your funds crossing different thresholds. Therefore, if you only review your investments semi-regularly (and want to have a life besides 'professional' moneysaving / investing ) then setting alerts on different stop limits.

Note: this is no substitute for good research, but can help keep you aware of changes in the value of your funds.

The Morningstar web site also provides a good fund overiew capability, as not all fund managers subscribe to the trustnet site.

As dunstonh mentions, a diversified portfolio reduces the overall risk. If you are investing in high risk funds, then it is probably worth having a view what you will move your funds into if the market drops, as doing research then is probably a bit late.