Suggestions to an investor

A reader asks,

“I’m in my early 30’s and was wondering what advice you might have for someone in my position who is in full time employment, invests in the stock market as a hobby and with the exception of a mortgage doesn’t have many other financial commitments?”

This is a big question. I started making a few notes and soon realised a half decent reply would fill an average sized book. Well it turns out being retired is a lot busier than most people realise, and I don’t have the time to write a book tonight. Therefore here are a few pointers in the form of a brain-dump. I hope readers might find a few nuggets buried in this post that they find helpful.

  • Keeps costs low, so avoid expensive funds, expensive brokers, etc.
  • My investment strategy is to invest in both ETFs and directly in company stocks. For EFTs I look for Ongoing Charging Factor (OCF) or Total Expense Ratio (TER) of <0.1% for UK & USA indexes, or <0.25% for world indexes. Low cost ETFs are available from Vanguard, I-share, HSBC, and a few other providers. Passive tracker funds may be more applicable than ETFs for smaller transactions such as monthly drip feeding, but I prefer to invest lump sums and prefer the transparency of ETFs. (For comments on direct share ownership please see further down this brain-dump).
  • For finding a broker I suggest the “compare brokers” page from the Monevator site . All legitimate brokers will be registered on the FCA site. As your portfolio grows larger, you may want more than one broker (to avoid all eggs in one basket).
  • Keep taxes low, so maximize ISA allowances, learn how to fully exploit a SIPP.
  • Make the most of any employer’s pension contribution matching.
  • Manage your living costs, live well but don’t go overboard! So look for the most economical ways to have a good life.
  • Back in the day when interest rates were high, it was considered good practice to pay down your mortgage (or at least most of it) before investing for non-guaranteed returns such as on the stock market. Some might say with low interest rates this advice is no longer applicable. My thoughts are to do your own risk assessment, but be sure to only invest what you can afford to loose. So you might pay down enough of your mortgage that it would not be too much of a problem if disaster stuck (such as redundancy and taking on a lower paid job, or if interest rates were to double).
  • Keep a cash float. This will be useful to fix the roof (or whatever other unforeseen disaster) without becoming a forced seller at times of market weakness.
  • Don’t allow excessive lifestyle inflation, so invest any pay rises & windfalls in your chosen investment strategy.
  • Make sure you understand everything you invest in. If an investment product is even slightly complex, then it is probably ripping you off! Simple is always best.
  • If investing in stock markets then make sure you have exposure to the markets throughout the cycle. This is hard to do when shares fall, but if you bail out the chances are you will miss the recovery. I have a FTSE100 chart printed out and pinned on my pin-board that covers the dot-com crash (just as I started my investing career), the banking crisis and the other smaller corrections. These events were very hard at the time, but now are just blimps on the chart. It is reassuring to look at this chart when the markets are down. However I generally stop investing new money during periods of rapidly falling prices, but…
  • When the stock market is on its knees & everyone is running scared, invest all you can afford to loose. John’s “FTSE100/FTSE250 Valuation” posts are useful for knowing when the market is cheap. Again buying into a low market is hard to do when all the talking heads are predicting the end of capitalism as we know it, but this is the time when you stand to make the most.
  • Have a clear investment strategy. Maybe write it down (I’ve not written mine down – shame on me). Stick to the strategy, although it is okay to adjust the strategy as you learn more.
  • Read a lot. Read investment blogs, investment books, media articles etc. Pass everything through a bullshit filter and adsorb the valuable stuff. Act on what you learn.
  • Specifically read about cognitive biases.
  • But avoid reading some of the popular and very busy bulletin boards, as it is too easy to get swept along with the positive vibes coming from those who are blinkered by various cognitive biases. Stick to reading only trusted information sources.
  • If you are going to pick individual stocks (rather than sticking 100% to ETFs) then..
    • Learn about the balance sheet and the cash flow statement. In my opinion these are the most important parts of a financial statement. For example, you need to knowing when profits are inflated by capitalising development costs without appropriate amortisation, and to know about free cash flow conversion, etc. You could fill a few books with this stuff, but don’t be put off if this is new to you. Start with the basics and aim to improve (see Stockopedia mentioned below for an easy way to access data and education on this topic).

    • Subscribe to a RNS feed such as Investegate, The London Stock Exchange or Vox Markets. These are free but do require a registration. Other services are also available.

    • To take away the guess work when finding shares that meet your criteria I use Stockopedia (affiliate link) for data, screening, portfolio management and more. This is a paid service, but you can apply for a 14 day free trial. Another popular data source is ShareScope, which I previously used. Other services are available. Don’t underestimate the time it takes to source all the data you need from free sources.

    • Screening for stocks is a personal thing, I screen for a large number of attributes designed to weed out poor value, poor quality and unsafe earnings. There is usually help for this, and model screens available on popular data sources such as those mentioned above (at least there is on Stockopedia).

    • However this is just the start of the research, for me it is also necessary to read the financial statements, visit the company’s web site (to see what it offers its customers and to check out the investors’ pages), check out any coverage on Stockopedia or sites such as PIWorld. It can also help to research competitors.

    • I avoid “jam tomorrow” stocks. Much better to have real earnings, real growth, and real dividends, although for certain special situations my strategy allows a very small number of non-dividend paying companies.

I hope this quick brain-dump is useful.

None of this should be considered advice as I am not a professional. You should do your own research before making up your own mind what course of action to take.

Thanks for reading.

8 thoughts on “Suggestions to an investor

  1. Hi,
    Thank you for the very thorough and detailed response to my question. It is much appreciated! There’s a lot of food for thought there and great to see some overlap from my previous reading on the topic as well as some new information too. A lot to take away and very motivating- have spent the Sunday researching and reading!

    I currently screen for stocks by looking at what well known value investors are buying and then doing my own due diligence on those stocks. I used to use a stock screener previously but have found this ‘cloning’ and then doing my own research method works better for me (as you said personal preference). It’s interesting what you said regarding investing in ETFs as well as individual stocks- this is something that I am currently considering but maybe to drip feed an index fund as well as holding individual stocks (for more diversity). Has the balance/percentage allocation that you give to each changed from when you initially started to perhaps now when you are actually living off the portfolio?

    I’m in the process of writing out an investment strategy as you mentioned …should this also include the age you want to retire/be financially free by? Hence a final figure needed to do that with % dividend income, annual rate of return needed, amount to be invested along the way as well as stock/index selection/allocation? Or is that too much level of detail given we can’t reliably predict the stock market?

    Thank you again for taking the time to reply and kind regards,

    1. Hi Guv

      I use EFTs (of the low-cost index tracker variety) for a number of reasons, all of which are part of my strategy. The main reasons are that they offer instant diversification with little effort, they also offer easy access to foreign markets where I don’t have enough local knowledge (I like to make sure I understand everything I invest in, and I understand an EFT more than I understand individual companies in foreign markets), and they are a quick way to invest when I’m short on time to research individual shares and don’t want to be out of the market. Also they are easy to understand for when I eventually die and my wife has to take over the portfolio (my instructions to her are sell the individual company shares and invest in the proceeds in the existing ETFs in the same proportions as already there, then do nothing more). For these reasons ETFs were important whilst I was still employed, and remain important now. They are a big part of my portfolio (typically about half). I’ve not intentionally changed the allocation since I retired.

      I view my strategy as a guidebook to guide my actions both in normal market conditions and in times of market stress. So this includes asset allocation, trading frequency and trading rules, leverage (I don’t use any leverage), the types of asset classes in which I invest, and what will happen in various situations (both market driven and personal changes). Knowing why you are investing, if it for retirement then when you hope to retire & what other income you might have, dependants, other personal circumstances etc. will all inform your strategy.

      My strategy is not entirely conventional, and certainly not suitable for most people due to the inbuilt risks (which are okay in the long run but not for the faint hearted in the short term). For this reason I’ll not be sharing all of it here, in case anyone tries to follow it and comes unstuck.

      However I will say that in my case I did not have a target portfolio size as such, but I did have a target income level. Also my retirement age was “as soon as possible without actually undergoing any hardship on the way”. I decided in retirement I’d only draw down the natural yield, and stay fully invested to capture future dividend growth that would hopefully protect my income from inflation. Therefore once my investment income comfortably matched my earned income (less my monthly level of additional saving), then I knew I was financially independent. Once I also had a suitable margin of error I knew I could retire.

      Because the value of my portfolio was secondary in my strategy, I became very much less concerned about market falls (so long as overall the level of dividends were more or less maintained). So each time my portfolio fell in value during a falling market, the dividend yield became higher, resulting in the same income. I used to measure this on a monthly basis. As a result of this approach, many of the other parts of the strategy are concerned with making sure I invest in companies that are strong enough to maintain their dividends throughout the business cycle, and to diversify enough to limit the impact from the occasional but inevitable dividend cut. I also allow myself a small portion of the portfolio as “play money” which I invest in higher risk AIM stocks & special situations for a bit of fun. As a result all this I hold about 40 to 50 stocks in my portfolio, again this is not a conventional number being a little large for most people’s needs.

      In short my policy was to thing hard about what I wanted to do, then to work out how to invest to achieve this, and to design a personal methodology to cope with all foreseeable market conditions. Any time I found my strategy lacking or sub-optimal I evolved it to better cope with circumstances. Since it has always been measured by income then the only change since retirement is that some of the income is drawn down rather than reinvested (in fact this is not strictly true due to a cash balance held at the time of retirement to mitigate the sequence of returns risk, so part way through my second year almost all the dividends are still reinvested).

      Hope this helps you find your way, even if only as an example of how not to do it. (DYOR etc!)

      1. Hi Ric,
        Thank you again for the very thorough response. A lot of things for me to consider there mainly in the part of investing for capital gains vs income depending on what the overall goal and strategy is. Both are important but like you said this comes down to the individuals needs and requirements.

        I’ve always primarily looked for capital gain in the hope to build up to a point where the size of the portfolio is large enough to then consider switching to a strategy to supply more income. However, I find it very interesting that like yourself why not start income focussed as that is the overall aim.

        Some very good insights you provide into ETF’s also which to be honest I only know the very basics about but has peaked my interest and I’ll certainly read/research into further.

        A lot of food for thought and thanks again!

        1. Your welcome!

          BTW, speaking about an income focus it is like you said, “Both are important”. Growth is an important factor because without it you’ll find future dividend increases are non-existent. Also a too high dividend is a red flag for a possible value trap. So I feel sustainable income is very (but not exclusively) important and so is one of my most important measurements for overall portfolio performance.

          I assume you’ve used the Monevator site? There are lots of ETF articles there (and articles on index funds if these more appropriate to your needs, such as if you are drip feeding rather than investing occasional lump sums).

          Best of luck.

          1. Hi Ric,
            Thanks again for a detailed response.

            Yes totally agree that growth and income are both very important- especially like you said because without growth ‘future dividend increases are non-existent’. Also, as you said need to be weary of too high a dividend for a possible value trap.

            Thanks for suggesting the Monevator site…to be honest I’ve seen some comments from Monevator on the UK Value investor site but not actually looked at the site previously. Some very good material and information there regarding ETF’s, indexing, costs and much more so thanks again!

            Also, as a side note is stocks/ETF’s the only asset class you’ve invested in to retirement? The other additional avenue I’ve been exploring in addition is buy-to-let. Would be very interesting to hear any thoughts on this?

            Much appreciated!

          2. An interesting question!

            At the moment I have mainly stocks, some cash and one of my pensions is a final earnings scheme which of course has some bond type characteristics in that it is not correlated to the stock market. I would not recommend this strategy for most people as you need to be able to stomach massive market falls, say 50% to 70% and still hold your nerve. I’ve had large falls in value a few times, and it is not pleasant.

            Up until earlier this year my wife and I also had a buy-to-let property that we purchased early in 2012. We decided to sell the BTL for a number of reasons, mainly it was simply too much hassle. In addition the property market in our area became unsustainable high, possibly signifying the top of the market. The increasing number of new regulations being introduced for landlords was also worrying. We thought that the tax changes for those unincorporated landlords funded by debt and the extra stamp duty on buying any additional properties were probably the start of a slippery slope, down which we did not want to travel. Other factors included the inability to handle BTL investments in a tax efficient way, the lack of instant liquidity should we need it and the inability to partly liquidate the investment (you can’t sell half your holding of a house like you can some shares in a company).

            Some years ago I had intended to further diversify with a business on the side. However I found the business idea was not practical whilst still in full time employment. The time spent on accounting, form filling and the cost of insurance, the tax etc. meant that I was working all the hours to only break even. Therefore I wound the company up and walked away with no debts and a valuable lessons learned; that quality of life is also important if you are going to stay the course.

            I hope my experiences help you devise your own diversification strategy, but what I’ve done is certainly not a recommendation. In any case, given the current point in the market cycle I doubt it would be sensible for most people’s circumstances at the moment.

            All the best,


  2. Hi Ric,
    Thank you again for a very detailed and thorough response.

    I absolutely agree with your thoughts regarding BTL and the new rules, tax implications, liquidity issues and hassle of general running and maintenance (which of course you can pass on to a letting agent but then does eat into the returns). Also, with current prices the rental return yields are not what they used to be…unless you can find an absolute bargain!

    I also agree with what you said regarding having a business and the affect it has on quality of life especially if also working a full time job. Quality of life is the ultimate thing we are trying to improve! I do, like yourself, have a preference for stocks and the stock market as a whole although am open to BTL should there be a tempting bargain which is very difficult in current market conditions.

    Have been doing some more reading on the Monevator site and there really are some great articles on there so thanks again for that recommendation!

    Much appreciated,

  3. You’re welcome Guv,
    Yes, the Monevator site is a great resource. I’ve been a regular reader there for many years, since back when The Investor was the only blogger on the site, and he frequently discussed the relative merits of individual shares. In those days it was a purely active investment site.
    Best of luck to you

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