DIY Investor Toolkit: here are the mistakes and lessons I have learned since I started investing five and a half years ago.
Five and a half years ago, I decided to get some “skin in the game” and open my first stocks and shares Isa account. As an investment journalist, I felt it was important to align my interests with those of readers; but along the way I've made some mistakes that novice investors all too often make, so here I share the lessons I have learned.
Too much tinkering
As a financial journalist, I have lost count of the amount of times I have preached the virtues of investing for the long term and how adopting a “buy and forget” approach can stand investors in good stead. In reality, I have been guilty of making too many changes, and if I had resisted my portfolio would have grown to more than it is worth today.
The main change I made was to sell Fundsmith Equity after seeing returns soar three years after I had invested. I sold when I realised the returns I had made would cover the driving lessons I badly needed with a child on the way.
At the time, I had a savings pot I could have dipped into (that is paying negligible levels of interest), but I wanted to reward myself and feel like I wasn’t really paying for the lessons, so instead I opted to take the profits and run. Instead, I should have dipped into cash and then replenished it by putting aside a certain amount from my monthly salary.
Over the five-year period, I also sold another fund, which takes me on to lesson number two.
Invest in what you know
The fund I sold is essentially a hedge fund (which can bet against stocks, so-called shorting) that retail investors can buy. Over a short time period, it suddenly fell like a stone, but I didn’t understand why it had declined so sharply, and so I then moved swiftly to cut my losses.
From then on in, I decided to invest only in the more conventional funds and investments trusts, those that simply buy shares in the hope their share prices increase over time and don’t rely on shorting as part of their approach.
Failing to rebalance
Another smart tactic I have written about over the years is to “rebalance”, which involves selling some holdings in your winners and investing those gains into investments that have underperformed.
This, though, is something I have not taken advantage of. Again, if I had done so I would (with the benefit of hindsight) be sitting on a larger paper gain. For instance, in the first couple of years my two global holdings, Fundsmith Equity and Scottish Mortgage, performed remarkably well, while my emerging market investments largely did nothing.
If I had taken some profits from the two global funds at that point and reinvested them into the two emerging market funds I owned at the time (Stewart Investors Asia Pacific Leaders and Aberdeen Global Asian Smaller Companies investment trust), I would have benefited to a greater extent when emerging markets returned to form and enjoyed a strong two-year period from the start of 2016 to the start of 2018.
Your rebalance comment is wrong oh so wrong
I love the MO articles short snappy and too the point but they also have very good information. However I have read this very good article quite a few times and each time I have to scratch my head at the 'Failing to rebalance' paragraph.
The taking of profit from winning investment is a cause for concern with me as it simply does not make any sense. Stanley Druckenmiller stated "high returns are built through preservation of capital and home runs". In taking your profit from a successful investment and putting it into a less successful one you are effectively reducing your high return in a number of ways.
Perhaps you should be staying in the successful funds and switching out of the less successful investments. This was something I had to do earlier this year in fact I am no longer in any of the funds I was in 6 months ago and my portfolio is the better for it.
Again it did not make any sense then and it still doesn't now.