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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello, and welcome to our latest On The Money podcast, a weekly show that covers investments and pension topics in a practical manner. I'm Kyle Caldwell, and today, I'm joined by Dave Baxter, who is senior fund content specialist at Interactive Investor. So, Dave, it is our two hundredth episode. And to mark the occasion, we're gonna cover the sort of golden rules that we think investors should follow. And many of these golden rules we've covered across the previous a 199 episodes.
Kyle Caldwell:So we thought, let's put them all together for this 200 episodes to celebrate.
Dave Baxter:Absolutely.
Kyle Caldwell:And before we get started, I'd just like to say a big thank you to everyone who's listened to the podcast, whether you're a new list... New listener or you've listened to many episodes over the years. If you've never given us a rating or a review, I'd really appreciate it if you took the time to do so on your preferred podcast app. Those ratings and reviews, they are really powerful in terms of feeding into the algorithms of this podcast appears in more and more places, so it gets into more and more ears. Let's now move on to our two hundredth episode.
Kyle Caldwell:So as mentioned, we're gonna cover the golden rules that we keep on coming back to. Number one on our list is to learn from the world's greatest investors. So, Dave, over to you to give a run through of which investors should our listeners be taking a closer look at.
Dave Baxter:So there are many legendary investors out there. To name a few, you have Warren Ruffett, you have Benjamin Graham, you have Peter Lynch, maybe a bit less well known, and you have John Bogle, the founder of Vanguard. And, yeah, they can provide you inspiration, encouragement, and useful lessons. You can read many books by these individuals, and also there are just, you know, so many kind of interesting quotes and sayings attributed to them that can kind of capture these really useful investment principles for you.
Kyle Caldwell:And you mentioned Benjamin Graham. He's the tutor of Warren Buffett or he was. And, you know, his book, The Intelligent Investor, was written, you know, around eighty years ago. But, you know, the the investment or premise of that book and the the various sort of, like, rules that he's come up with, they're still very relevant today for investors. And as you mentioned, you know, these world's greatest investors, they have great quotes and anecdotes.
Kyle Caldwell:And for me, my favorite one is from Peter Lynch, who worked at Fidelity for a long time as a full manager. He says he would only invest in a company that he could illustrate with a crayon. Think I that's a great one because that shows the importance ultimately of understanding and getting to grips with what you're investing in Mhmm. And considering who are the company's competitors, and will the company in future remain or be a leader in its respective field?
Dave Baxter:Mhmm. Yeah. That's a good one.
Kyle Caldwell:Number two on our list is to understand risk versus rewards. Dave, could you start off by explaining, particularly for a beginner investor, what are the sorts of things they should be thinking about here?
Dave Baxter:Yeah. So I guess if your investment is kind of punchier, then in theory, it should, you know, have potential to give you greater rewards, but on the other side, it carries more risk, more volatility, more uncertainty. And when... It's kind of industry jargon to an extent, but when we talk about risk rewards, it's important to understand your own appetite and approach to that. And that relates to what you're comfortable with and what you can tolerate.
Dave Baxter:So you might want kind of good gains over time, but for example, how would you feel if your portfolio fell by kind of 20% overnight? And there there are things like your circumstances which will kind of influence that and which may actually play a base... A greater role in what you should do, but it's just about matching your kind of goals and your targets with also your... What you're kind of comfortable with and your sensibilities.
Kyle Caldwell:That leads me on to our golden rule number three, which is to is to have goals and objectives. If you have a sort of time horizon in mind, you think, okay, I'm investing for x, y, and z goal, and say, you know, okay, I'm I'm investing because in ten years, I wanna use the money for, you know, whatever purpose, then that can really help sort of dictate how much risk you can tolerate. Because if you're investing for ten years, you can potentially consider more adventurously invested funds, like a fund that invests in Asia Pacific or the emerging markets, for example. That could be part of your portfolio. And, you know, as as part of, you know...
Kyle Caldwell:I'd I'd I'd look at the funds and consider where is it on the risk spectrum, you know, at the at the, you know, the low low risk end, you've got to say a money market fund. Somewhere in the middle, you've got like a global equity fund. And then in the more adventurous area, beyond what just mentioned, Asia Pacific and emerging markets, you've got funds that invest just in China, India, or Vietnam, for example. Mhmm. So you need to think of the context of where does the funds sit on that spectrum, and am I comfortable with that risk relative to the investment objectives and goals I have?
Dave Baxter:Yeah. And it can run both ways because especially with, say, pensions, people can end up being too cautiously invested. So if you... As many people with their pensions might find, if you have, say, twenty plus years still to go until you need this, until you can access it, then you want to be all in equities or all in kind of those riskier assets because you have time to kind of ride the ups and downs. Whereas, I don't know, say you're saving for a house, say you're saving money for for a wedding or something, just have a few years, you may wanna be quite cautious or even not actually invest just yet.
Kyle Caldwell:However, you know, what investors do not know at the outset is how well an investment will fare, whether whether they invest in the shares, funds, investment trust, or ETFs. But one thing they can control is costs. And for me, I think it's important to consider costs in the context of what is the typical fee for that type of product. So if you're investing in a global index fund or ETF, what is the typical fee? For that type of product, you should be looking to pay less than naught 0.15 percent a year these days, which is probably actually now cheaper than chips.
Kyle Caldwell:However, if you're investing in an actively managed funds, invest in the developed market, you're typically looking to pay naught point eight to naught point 9% a year. However, on charges for actively managed funds, one thing I'd say is that there's nothing wrong paying a premium if its performance is doing the job for you and it's fulfilling a role in your portfolio.
Dave Baxter:Yeah. My hot investment take is that perhaps people should worry less about active fund fees than they do. Of course, they should be competitive, but for me, if I held an active fund, I'd be more worried about whether it's doing what it's meant to. So if it's a kind of defensive fund, is it actually defending me where markets fall? And if it's a growth fund, is it actually beating, you know, the MSCI world, for example, which is not an easy task?
Kyle Caldwell:That now leads me on to our fifth golden rule, which is to put past performance in context. So the first thing I'd say on this is, you know, you should try and compare apples with apples. So if it's, say, a UK funds that invests in value shares, you should be comparing its performance against rivals that invest in the same way. If you look at the funds and compare it against the sector average that's got hundreds of funds that, you know, various different strategies, that might even tell you as much. And I also think, you know, on a fund fact sheet, you'll see performance over one, three, and five years, but it can actually be better to take a step back and look at the full context of the performance over, say, a five year period.
Kyle Caldwell:Yeah.
Dave Baxter:I mean, those kind of standard time frames can mask quite a lot of nuance, and it's very useful to also look at kind of specific periods. So especially when we're talking about investment stars, you'll have certain times when stars done very well and done very badly. So let's say, you know, you're talking about UK value funds. If there's a period when they've done very well, which they have done, say, the last, what, couple of years, then you want to see how they've done versus the competition in that period, you would expect them to be performing exceptionally. Whereas if you're looking just a few years ago, Run Value was really, really out of fashion, then you'd kind of expect not to be doing well, but you would hope they'd be doing almost less badly than the competition.
Kyle Caldwell:And with investment styles, if you mix and match, that's one of the various ways we can give your portfolio plenty of diversification, which is our next golden rule. Mhmm. Dave, could you sum up in a nutshell why diversification is viewed as such an important tool in the armory for investors?
Dave Baxter:Yeah. So it's not really sexy or glamorous, but I think it's my favorite because it's just... It strikes me as the most kind of sensible and obvious one. It's that old kind of saying of not putting your eggs in all in one basket. It's just that investing is unpredictable.
Dave Baxter:You don't know if a certain company, sector, geography, that kind of thing is still gonna stay dominant, still do well. So you want to have a bit of everything so that when something surprising happens, you're a bit more spread out.
Kyle Caldwell:And diversification, you know, is one of the ways in which investors can sort of safeguard against risk, but also give their portfolio ample opportunity to grow over the long term. Now another way to reduce risk is by investing regularly rather than investing all at once. Invest in a lump sum, for example. If you invest regularly, you're investing, well, you're benefiting from something known as pound cost averaging. But essentially, you know, if you commit an affordable amount that you're gonna invest, say, each month, what you're doing is you you're ensuring that you're not putting all your money into the market just before a nasty dip.
Kyle Caldwell:So you you sort... You're spreading your bets, essentially.
Dave Baxter:You're also interestingly taking advantage of the idea of inertia because let's say I set up a direct debit to buy x funds with so much money every month. I'm gonna stop thinking about that. That's just gonna come out when I get paid, and you're just kind of automating something over time that will build to a, you know, substantial pot, hopefully.
Kyle Caldwell:And if you can, as well as, you know, considering investing regularly, if you if you can reinvest income, which is next on our list of golden rules, then that can have a really powerful effect over the long term because those reinvested dividends, they go into the pot of your overall investment returns. And those investment returns, over time, they're compounded, So this is where your investment retainers themselves generate future gains, so on and so forth, and it leads to this snowball effect that gets bigger and bigger over time. And it's, know, and that's... And it's one of the reasons why, you know, people should try and consider investing as early as possible because you're given your investments as much time as possible to compound over the long term.
Dave Baxter:Yeah. In the fund space, there are so called share classes, so kind of one option into a fund, which are labeled as distributing or income, and they will pay the dividends received out to you. Whereas the, you know, accumulation or growth ones will reinvest it automatically. I sometimes worry that some investors are in the kind of dividend paying share classes, and maybe it's... It seems like a nice perk to be receiving this money once a month or once a quarter or half, you know, year or so on.
Dave Baxter:But they are missing out on, as you say, those substantial kind of long term benefits.
Kyle Caldwell:And, I mean, another thing I'd say on fund share classes is, well, they're an absolute minefields, And, you know, they have various letters, and in most cases, they're not very intuitive. What I would say is that, okay, once you've decided whether you need the income, so you're gonna pick the income share class, or you're happy to reinvest the income over time, so you pick the accumulation share class. Once that decision has been made, Just then simply finds the cheapest share class that you can find on Interactive Investor. You'll see multiple share classes, but just find the cheapest one, and don't be bogged down and select that one. This now leads me on to our next golden rule, which is to invest in what you understand.
Kyle Caldwell:So, Dave, I mean, it it seems quite a simple rule, but it it is one that, you know, some investors can actually get themselves a bit tangled in or not by.
Dave Baxter:Yeah. I mean, even I kind of think of multiple ways to interpret this. So on the one hand, maybe it's just the idea of... In the investment world, you know, many esoteric products get developed, You get kind of hedge funds. You get strange kind of bets on currencies.
Dave Baxter:You get these these things that might seem quite glamorous and quite sophisticated. But I think if you don't understand them, which many people, you know, don't understandably, like, maybe you shouldn't be putting money into it because you don't really know what's gonna happen. You perhaps can't really fit it into your portfolio and you're kind of... Yeah. You're inviting some risks into your portfolio there.
Dave Baxter:So on the other side of that coin, it's useful just to get to grips with some of the kind of basics, understand, like, how equities work, understand if you look into a fund you're considering buying, what it's holding and what very broadly you are exposed to in terms of trends and markets and that kind of thing. One more granular interpretation of this whole idea of investing and what you understand is sometimes, especially when people pick stocks, they like to kind of really know a company or they like to understand the industry it's in or understand the, you know, the trend they're playing. And that does have appeal, but I think if you're only following that principle, then you can end up investing in a very narrow range of companies, and you want to not sacrifice diversification for this particular role.
Kyle Caldwell:And in terms of funds, obviously, there's there's various types and various different types of strategies. You don't need to understand completely, you know, every single share that the full manager holds. You know, at the end of the day, you're paying for the full manager's expertise. But I do think it's important to understand what the full manager is seeking to do in terms of the investment objective because I think this can really help inform whether or not that fund has given you value for money in terms of how it's performed over time versus, you know, a like for like comparison. Next up on our list is to...
Kyle Caldwell:Is the importance of reviewing a portfolio among the times a year and rebalancing. So Dave, when reviewing a portfolio, what are the main considerations for investors?
Dave Baxter:So one is performance, and I suppose the performance of each kind of component of your portfolio. Is it doing well? Is it not? What might the reasons be for that? And I guess interestingly, once you've looked at that, you want to consider how the portfolio has shifted.
Dave Baxter:So for example, say I've thought about my risk reward tolerance, my goals, and I thought I want 80% in equities and 20% in bonds for a bit of defense. In the last year, what you've seen interestingly is equities have generally done incredibly well and bonds have been, you know, in the teeth of this very fierce sell off. So that portfolio I kind of gave as an example, things were shifted around a bit. So you may then want to consider what we call rebalancing, where you basically just shift your portfolio back to those original weightings in order to, I guess, kind of line back to your original risk level.
Kyle Caldwell:That's exactly what rebalancing does. It restores the risk level of your portfolio back to what it was when you first put it together. There is, of course, you know, no investor wants to sell a winner too early. But if you do keep on running a winner, then it could potentially increase the risk level of your portfolio to a level that you're not comfortable with. And finally, on our list of golden rules is to not give up.
Kyle Caldwell:As investors, we're all gonna make mistakes. But for me, you know, it's important to, you know, not make the same mistake twice, and don't beat yourself up about it. You know, it's all part of the learning process. I think the important thing is to, you know, invest for the long term, and, you know, if you do have the money to invest, to not leave it in cash over long periods because all historical data shows that if you do that, it's gonna lose its value in real terms to inflation.
Dave Baxter:Yeah. And, also, hopefully, you get to kind of enjoy yourself on the way as well because it is a, you know, a very interesting thing to get into.
Kyle Caldwell:Yeah. I mean, we both invest ourselves. We both enjoy doing it. And, you know, I do think it is. I think if you are a more hands on investor, you know, learning about investing, you can you can pick up the bug pretty quickly.
Kyle Caldwell:And I'm sure a lot of the... Our listeners that tune in regularly, you know, they they love investing, they wanna learn more and more.
Dave Baxter:Yeah.
Kyle Caldwell:And thank you for listening to this episode of On The Money. We always love to hear from listeners. So if you've got an idea of a future topic you'd like us to cover, then please email us on otm@ii.co.uk. As ever, there's lots of insightful investments and pension articles on the Interactive Investor website, which is ii.co.uk. And we'll be back as usual next Thursday.
Kyle Caldwell:So, hopefully, see you then.