Rules of Engagement

bugbyte_2

Everything I have read has suggested you formulate some investment rules before you start then stick to them. My rules for £20K are below. What's yours?


1. Work out your asset ratio dependent on what your attitude to loss is, and how long you expect to be in the market, and how much cash you want as a back up. The ratio can be described as Cash : Bonds : Equity : Other. Other can be a Triumph Spitfire. (My desired ratio 5 : 2 : 10 : 3)

2. Pick funds for equities and bonds, not individual shares. Its safer and avoids extreme highs and lows.

3. Fund expenses are a killer, therefore minimise any expenses. This includes:
a. Use a stocks and shares ISA for tax purposes
b. Use a platform that is cheapest for your selected portfolio. i.e. no platform fee, return of any trail commission, No initial charges, etc.
c. Use funds with the lowest Total Expense Ratio (TER). For equities, these are typically trackers. (My portfolio has a total TER of 0.43%)

4. Drip feed into your funds. It irons out fluctuations in the market, and you can start each fund off with as little as £50.

5. Try and work out what Broad and Balanced means in the context of what sectors you know and your asset ratio. (For my 10K Equity – 30% UK Mid and Large Cap, 30% Americas, 10% Pacific, 10% Japan, 10% Europe, 10% Emerging. Bonds All UK Corporate.)

6. Have a plan of what sectors you are going to invest in and when. (For me, I’m building up UK, Americas, Pacific first).

7. Drip fee cash into a regular saver at the same time.

8. Understand that your emotional brain will panic and try and buy high and sell low. Never sell after a crash.

9. Stick to whatever rules you formulate.

Ark_Welder

1. Do not allow ego or overconfidence to drive investment decisions. Accept that there are limitations to personal ability, and what these are.
2. Determine the investment timescales and objectives. Once these are determined, other rules should fall more easily into place. Remember that it is possible - even desirable - to have more than one objective and timescale.
3. Decide the level of tolerance towards investment risk, which will mainly be volatility and the capacity to accept a loss. These are not necessarily the same for all objectives and timescales, and should be determined to each individual objective.
4. Read up on investing and investments, and keep on reading: things can change so don't get complacent. Read views and opinions that conflict with those held: they do not have to be acted upon, but something new might be learned.
5. Cash is an asset in its own right, with its own characteristics. Remember this when deciding asset allocation ratios and always include take it into consideration when examining the portfolio.
6. Decide on ideal asset allocation ratios. Choose a range in which the weightings can vary without having to re-balance. In my case, ratios are: Equities 40%, Private Equity (inc. VCT) 15%, Property 10%, High-yield Bonds 10%, Investment grade bonds 15%, Cash 10%. To these I give a 5% deviation from the relevant ratio, so Equities have a range of 38%-42%, Cash 9.5%-10.5% etc. I do have an 'Other' category but no specific target.
7. In Rule 6, take into consideration the fact that closed-end funds that do not hold equities can still behave like equities at times, because they are traded on stock exchanges. Decide whether the asset ratios should be affected by this. (by default, I apply a 90% weighting to the relevant asset type. So PE, REITS and closed-end bond funds have a 90% weighting to their class and 10% towards equities. 90% is an arbitrary selection, and right now it gives an extra 1% to equities than if 100% was used instead).
8. If there is enough of a convincing argument for doing so (which may be subjective rather than objective), be prepared to allow one or more of the asset classes to trade outside their range, even over extended periods.
9. Don't make any investment without first having read the documentation, be it a prospectus, annual report or bank account T&C's, etc. Ensure that each investment is still delivering to the relevant objective by reading new documentation when it becomes available.
10. Never invest just on the say-so of anyone else - however authoritative they might appear to be. This also applies to journalistic articles. Certainly don't invest without understanding why the individual/organisation has that particular opinion, or how they have arrived at their conclusion: their timescales and objectives might be different, so their reason for holding might be irrelevant; they may be wrong with their conclusions; they may have an ulterior motive, e.g. share ramping.
11. The primary consideration for an investment is its purpose, what it brings to the portfolio: i.e. its suitability in achieving a specific objective over the relevant timescale. Secondary consideration is whether it is complementary to existing holdings, or whether it is to replace an existing holding. And for me, fund costs are of hardly any importance.
12. Diversification is good. Too much diversification can be pointless: any duplication of types of holdings needs to be really justified.
13. Do not panic. Do not be rushed into making decisions. Do not feel the need to buy just because others are doing so. Do not feel the need to sell just because others are doing so.
14. Whilst lessons might be learned from looking backwards, the past performance of any share/fund/country/asset-class is not an indication that the same will unfailingly be achieved going forward, especially over shorter timescales. (If I expect to live for another five thousand years then the 'performance' of certain assets over that time might be of relevance...). So what are the reasons for holding both new, and existing, investments going into the future?
15. Where are the escape hatches located? If there is a problem in part of the portfolio, which other parts are there to mitigate the effects?
16. Be prepared to accept that decisions that have been made can be wrong. When this does occur, refer in the first instance to Rule 13.
17. Remember that timescales do get shorter, and that objectives will change accordingly. Re-visit Rule 1 onwards.
18. Breaking rules to have some fun is allowed. But not with more that 5% of portfolio at a time. And only with the rules mentioned so far...
19. ...so, never make investment decisions whilst drunk
20. After making investment decisions whilst drunk :dance:, never act on them (if at all) until sober :doh: