Smarter Investing: Tim Hale

In a nutshell:
– Invest in index funds
– Use a platform like Vanguard (lowest fees I’ve found so far)
– Pick an index you want to track e.g. FTSE (by national economic index), by sector (fashion, Tech, energy), by geography (Europe, US, emerging markets)
– Choose the stocks and shares ISA
Decide how risky you want your portfolio (50% stocks and 50% bonds? Stocks more risky but highest reward, bonds less risky but lowest return)
– If you need income as well, look up stocks or indexes that pay a dividend
– Consider putting 5% of your gross salary into a LISA for retirement

The r/wallstreetbets drama that opened this year suddenly made understanding the basics of investing much more appealing than it had ever been. In typical fashion, I was speaking much more confidently than I should’ve been to friends and family about concepts I knew zero about. The insecurity about my knowledge being exposed led me to “Smarter Investing” by Tim Hale. Although heavily advising from a UK point-of-view, this book gave me the best understanding of investing from scratch I could find.

Here are some of my takeaways:

Good investing = owning a sensible, highly- diversified, low- cost and stable portfolio, put in place for the long term, and which is re-balanced back to its original mix from time to time.

It is also about having the fortitude to keep ‘on message’ when the markets feel extreme on both the down and the upsides.

Costs (as defined by a fund’s total expense ratio or ongoing charges) are a better predictor of future performance.

An investment process that mitigates some of the sources of leakage from the portfolio due to emotional, rather than rational, decision making. This includes regular re-balancing of portfolios back to their original mix on a regular basis, selling out of assets that have performed well and re- investing in assets that have done less well– a systematic, contrarian investment process.

If bonds deliver a return higher than inflation, and equities deliver a return of more than 4–5% above inflation, count yourself lucky.

Retirement = 15-20% of gross annual salary every working year.

The ultimate outcome is determined by who can lose the fewest points not win them.

The process of investing is thus one of risk selection and management.

Always look out for the ‘average credit quality’ for any bond fund that you are interested in. Check out what the minimum average credit quality constraint is and review the distribution of the credit ratings of the holdings of the fund.

Always find out what the weighted average duration of any bond fund product is. Duration figures should be readily available on the fund’s fact sheet and if they are not then ask for them from the fund provider. Once you know the fund’s duration you can work out how much its price will fall for a given rise in bond yields. Never buy any form of bond investment without knowing its duration.

Smarter portfolio construction

Issue 1: how globally diversified should your portfolio be?

Issue 2: what allocation will you make to higher risk emerging markets?

Issue 3: Will you overweight your exposure to smaller and value (less healthy) companies across all markets to increase your expected returns?

Issue 4: Will you include other asset classes to diversify equity market risk, such as commercial property? (Note that this is distinct from adding defensive assets to this risk basket.)

Issue 5: Should you take on non-GBP (or other base currency) currency exposure?

To mitigate the risk of inflation effectively, investors should own assets that naturally protect against inflation. That points you towards inflation-linked securities such as those issued by the UK government. Your choice is between UK index-linked gilts (bonds) or index-linked National Savings Certificates (although at the moment they are not being issued), or globally issued inflation linked bonds (but these should be high credit quality and all non-GBP currency hedged back to GBP).

Ideally, you would own shorter-dated inflation-linked bonds and shorter dated conventional bonds, again hedged back to sterling if you go global (e.g. five years) as they have lower price sensitivity to changes in yields and therefore have a low level of volatility and thus short-term risk to capital.

Each year, take a look at how your investments have done against their chosen index. Say, for example, you own a FTSE All-Share index fund – take a look and see what the total expense ratio is now, how closely the fund has tracked the index, how large it is and if there have been any changes in strategy or personnel.

The two key asset classes that we use in the Defensive mix – shorter-dated high quality (min AA) bonds and shorter-dated high quality (min AA) inflation linked bond.

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