“The pensions and savings arena is a blizzard of complexity, jargon and meaningless terminology; perfect material for obfuscation and bamboozlement.”
These are not my words. This is an extract from a report published last year. It describes the catastrophic state of the UK’s savings industry.
We are not saving anything like enough for our retirement. The savings industry at the moment is delivering a pitiful return. The City extracts billions of pounds from our savings to line its own pockets, but savers have almost no idea of just how bad a deal they are getting. “Motivated by the prospect of higher fees”, the report says, “the industry prefers to sell over-engineered complex products… what people want is common sense advice”.
In the first five issues of this series on DIY investing, I hope that is what I have given you. Along the way, I’ve mentioned that you should hold cash to meet your immediate needs, and invest directly into shares with any money that you can safely set aside for at least two years. That is what I do.
Stick to your guns
“How can it be so simple?” I hear you ask. What about unit trusts? What about gold? What about buying properties and renting them out? Why have you not mentioned any of these?
But this is the whole point.
The savings and investment world is fearfully complex. We simply do not have the mental capacity to understand and follow all markets. So we have to pare right back to a few essentials that we can continuously grasp.
I see so many investors charging off in pursuit of the latest hot theme, or some abstruse theory that they have read about in the weekend papers. The more investment advice that you read, the faster your head will spin. Even if all of these different investment opportunities made sense, private investors have a disastrous record of jumping on the train late in its journey, just before it hits the buffers.
You simply do not need to concern yourself with unit trusts, with fine wine and all of the other investment opportunities that are constantly thrown at you. Investing in overseas markets, by the way, is much over-rated in my opinion. But if you are going to go into Asian markets, for example, looking for fast growth, just make sure you know what you’re doing, or have some guidance from someone experienced in those markets.
Patience is crucial to successful investing
I am not saying that you can never make money in anything other than cash or UK shares. You certainly can. But what you need is a strategy that is manageable and that is going to serve you over the long term. Chasing after the latest investment fad is not the answer. Keep it simple and uncomplicated – that’s my opinion.
Of course, if you just hold cash and shares you must reconcile yourself to the fact there will be times when others are making money, but you are not. Others have done well out of gold in recent years, and that is fine with me. I have never held gold, and never will. I only invest in cash and the shares of wealth-producing businesses.
You also need to reconcile yourself to the certainty that there will be times when the value of your share portfolio will fall. This is inevitable, but so long as you only invest money for which you have no immediate need, this should not worry you at all. Indeed, periods of market weakness give you the ideal opportunity to add to your portfolio.
Let’s think about some of the traits you need to become a master investor.
Mental strength is important. You need to be calm. When markets are crashing and the economic news is gloomy, you will feel a great urge to sell out of all your shares and run for cover. But once you have stuck it out through a bear market or two, you will realise that that the market always recovers in time, and you will be pleased and proud that you did not dump all of your shares at the bottom.
Don’t try and predict the unpredictable
Do not attempt to time the market. This is not totally impossible, and if you were able to get out near the top of the market and back in at the bottom you could certainly improve your return. But it is very hard to do.
We have to reduce the whole investment process to a few decisions which we can realistically hope to get right. Investment is the art of the possible. It is not about perfection. It is as much about not making bad decisions as it is about making good ones. There will be times when you lose money. Even if you stick to the criteria for choosing shares that I outlined here, some of them will still turn sour. More important are your overall long-term returns.
You don’t have to get everything right. You will make mistakes, and you can afford to do so. I do not commend direct investment in cash and shares as a get-rich-quick scheme. I commend it because it is something that you can realistically hope to master.
It is certain to save you thousands of pounds’ worth of fees and, so long as you put in a bit of work, learn by your experiences and have realistic expectations, you should over time make good money.
Now, I always like to leave you with at least one ‘take away’ from each issue of Penny Sleuth – something you can use to improve your chances at investment success. Today, I want to point you in the direction of a great free resource.
Become a better investor in just a few minutes a week
It’s called MoneyWeek Basics. This is a twice-weekly email that, as the name suggests, is aimed at helping you if you’re just starting out in investing (or looking to improve). Each issue takes just a few minutes to read and deals with one basic concept of investing.
It might be how to choose a broker… or how to achieve your financial goals. A recent issue looked at tax-efficient investing and today’s issue focused on Isas.
It’s a great read and follows on nicely from this DIY series I’ve been sending you. The great thing is, MoneyWeek Basics is a series of roughly 50 parts. So whenever you sign up, you’ll receive every issue, starting with the first. And by the end, I reckon you’ll have learned a lot. You’ll be better placed to invest successfully.