200 episodes: 11 golden rules we keep coming back to

You can also listen on: Spotify, Apple Podcasts, Amazon

After 200 episodes of On The Money, one thing has become clear: successful investing is often less about finding the next big winner and more about sticking to a handful of proven principles. Kyle and Dave look back on the lessons they’ve returned to time and again, sharing 11 golden rules for investors.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to our latest On The Money podcast, a weekly show that covers investment and pension topics in a practical manner.

I’m Kyle Caldwell, and today I’m joined by Dave Baxter, senior fund content specialist at interactive investor.

So, Dave, it’s our 200th episode, and to mark the occasion, we’re going to cover the ‘golden rules’ that we think investors should follow. Many of these we’ve covered across the previous 199 episodes. So, we thought, let’s put them all together for this 200th episode to celebrate.

Dave Baxter: Absolutely.

Kyle Caldwell: 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 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 are really powerful in terms of feeding into the algorithms, helping the podcast to appear in more places and get into more ears. 

Let’s now move on to our 200th episode. So, as mentioned, we’re going to 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.

Dave, over to you to give us a run through of which investors our listeners should be taking a closer look at.

Dave Baxter: So, there are many legendary investors out there. To name a few, you have Warren Buffett, Benjamin Graham, Peter Lynch, who is maybe a bit less well known, and John Bogle, founder of Vanguard. And, yeah, they can provide inspiration, encouragement, and useful lessons. 

You can read many books by these individuals, and there so many interesting quotes and sayings attributed to them that can capture really useful investment principles for you.

Kyle Caldwell: You mentioned Benjamin Graham. He was the tutor of Buffett, and his book, The Intelligent Investor, was written around 80 years ago. But, the premise of that book and the various rules that he came up with, they’re still very relevant today for investors. 

As you mentioned, the world’s greatest investors have some great quotes and anecdotes. My favourite one is from Peter Lynch, who worked at Fidelity for a long time as a fund manager. He said he would only invest in a company that he could illustrate with a crayon. I think that’s a great one because it shows the importance of understanding and getting to grips with what you’re investing in, and considering the company’s competitors, and whether it will in future be a leader in its respective field.

Dave Baxter: Yeah, that’s a good one.

• How to invest like the best: Warren Buffett
• How to invest like the best: Benjamin Graham
• DIY Investor Diary: how I apply Warren Buffett tips to fund investing

Kyle Caldwell: Number two on our list is to understand risk versus reward. Dave, could you start off by explaining, particularly for a beginner investor, the things they should be thinking about here?

Dave Baxter: Yeah. So, if your investment is punchier, then in theory, it should have the potential to give you greater rewards, but on the other side, it carries more risk, more volatility, more uncertainty. It’s kind of industry jargon to an extent, but when we talk about risk/reward, 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.

So, you might want good gains over time, but for example, how would you feel if your portfolio fell by 20% overnight? Things like your circumstances will influence that and may actually play a greater role in what you should do, but it’s just about matching your goals and your targets with what you’re comfortable with and your sensibilities.

Kyle Caldwell: That leads me on to golden rule number three, which is to have goals and objectives. If you have a time horizon in mind, you can think: OK, I’m investing for x, y, z goal, and I’m investing because in 10 years’ time I want use the money for whatever purpose. That can really help dictate how much risk you can tolerate. Because if you’re investing for 10 years, you can potentially consider more adventurous funds, like one that invests in Asia Pacific or the emerging markets, for example. That could be part of your portfolio.

I would look at funds and consider where they are on the risk spectrum. At the low-risk end, you’ve got, say, a money market fund. Somewhere in the middle, you’ve got a global equity fund, and then in the more adventurous area, beyond what I just mentioned, Asia Pacific and emerging markets, you’ve got funds that invest just in China, India, or Vietnam, for example. 

So, you need to think of where the fund sits on that spectrum, and whether you are comfortable with that risk relative to the investment objectives and goals you have.

Dave Baxter: Yeah, and it can run both ways because especially with, say, pensions, people can end up being too cautiously invested. As many people with their pensions might find, if you have, say, 20-plus years to go until you need it, until you can access it, then you want to be all-in on equities or all-in on those riskier assets because you have time to ride the ups and downs.

Whereas, say you’re saving for a house or a wedding or something, and you just have a few years, you may want to be quite cautious, or even not actually invest just yet.

Kyle Caldwell: However, what investors don’t know at the outset is how well an investment will fare, whether they invest in shares, funds, investment trusts, or exchange-traded funds (ETFs). But one thing they can control is costs.

For me, it’s important to consider costs in the context of the typical fee for that type of product. So, if you’re investing in a global index fund or ETF, what’s the typical fee? For that type of product, you should be looking to pay less than 0.15% a year these days, which is probably actually now cheaper than chips.

However, if you’re investing in an actively managed fund in developed markets, you’re typically looking to pay 0.8% to 0.9% a year. However, on charges for actively managed funds, one thing I’d say is that there’s nothing wrong with paying a premium if the 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 defensive fund, is it defending me when markets fall? And if it’s a growth fund, is it actually beating 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 that you should try and compare apples with apples. So, if it’s, say, a UK fund that invests in value shares, you should be comparing its performance against rivals that invest in the same way. 

If you look at the fund and compare it against the sector average that’s got hundreds of funds following various different strategies, that might not tell you as much. On a fund factsheet, 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.

Dave Baxter: Those standard time frames can mask quite a lot of nuance, and it’s very useful to also look at specific periods. So, especially when we’re talking about investment stars, you’ll have certain times when stars have done very well and done very badly.

So, let’s say you’re talking about UK value funds. If there’s a period when they’ve done very well, which they have done, say, during the last 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, when valuewas really out of fashion, then you’d expect them not to be doing well, but you would hope they’d be doing almost less badly than the competition.

• Solutions to the UK’s biggest pension problems
• How much do you need to secure a comfortable retirement?

Kyle Caldwell: And with investment styles, if you mix and match, that’s one of the various ways to give your portfolio plenty of diversification, which is our next golden rule. Dave, could you sum up why diversification is viewed as such an important tool in the armoury of investors?

Dave Baxter: Yeah. So, it’s not really sexy or glamorous, but I think it’s my favourite because it strikes me as the most sensible and obvious one. It’s that old saying of not putting all your eggs in one basket. It’s just that investing is unpredictable. You don’t know if a certain company, sector, or geography is still going to stay dominant, and 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 is one of the ways investors can safeguard against risk, but it also gives 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 with a lump sum, for example. If you invest regularly, you’re benefiting from something known as pound cost averaging. Essentially, if you commit an affordable amount, say, each month, what you’re doing is ensuring that you’re not putting all your money into the market just before a nasty dip. So, 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 going to stop thinking about that. That’s just going to come out when I get paid, and you’re just automating something over time that will build to a substantial pot, hopefully.

Kyle Caldwell: And 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 go into the pot of your overall investment returns. And those investment returns, over time, are compounded. This is where your investment returns themselves generate future gains, so on and so forth, and it leads to this snowball effect that gets bigger and bigger over time. It’s one of the reasons why people should try and consider investing as early as possible because you’re giving 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, which are labelled as distributing or income, and they will pay the dividends received out to you. Whereas the accumulation or growth ones will reinvest it automatically.

I sometimes worry that some investors are in the dividend-paying share classes, and maybe it seems like a nice perk to be receiving this money once a month or once a quarter or half year or so on, but they are missing out on, as you say, those substantial long-term benefits.

Kyle Caldwell: Another thing I’d say with fund share classes is that they’re an absolute minefield. They have various letters, and in most cases, they’re not very intuitive.

What I would say is that once you’ve decided whether you need the income, in which case you’re going to pick the income share class, or if you’re happy to reinvest the income over time, and you pick the accumulation share class, simply find the cheapest share class that you can. At interactive investor, you’ll see multiple share classes, but just find the cheapest one, and don’t be bogged down.

This leads me on to our next golden rule, which is to invest in what you understand.

So, Dave, it seems quite a simple rule, but it’s one that some investors can actually get themselves a bit tangled up in.

Dave Baxter: Yeah. I can think of multiple ways to interpret this. On the one hand, in the investment world, many esoteric products get developed, you get hedge funds, you get strange bets on currencies. You get these things that might seem quite glamorous and sophisticated, but I think if you don’t understand them, which many people don’t, understandably, maybe you shouldn’t be putting money into it because you don’t really know what’s going to happen. You perhaps can’t really fit it into your portfolio and you’re inviting some risks into your portfolio there.

On the other side of that coin, it’s useful just to get to grips with some of the basics, and understand 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 in what you understand is sometimes, especially when people pick stocks, they like to really know a company, or they like to understand the industry it’s in or understand 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.

• Paying the ‘good daughter penalty’? How to protect your pension
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Kyle Caldwell: And in terms of funds, obviously there’s various types and different strategies. You don’t need to understand completely every single share that the fund manager holds. At the end of the day, you’re paying for the fund manager’s expertise.

But I do think it’s important to understand what the manager is seeking to do in terms of the investment objective, because this can really help inform whether that fund has given you value for money in terms of how it’s performed over time versus a like-for-like comparison.

Next up on our list is the importance of reviewing a portfolio and rebalancing. So, Dave, when reviewing a portfolio, what are the main considerations for investors?

Dave Baxter: So, one is performance, and the performance of each component of your portfolio. Is it doing well? Is it not? What might the reasons be for that? And, interestingly, once you’ve looked at that, you want to consider how the portfolio has shifted.

For example, say I’ve thought about my risk/reward tolerance, my goals, and I want 80% in equities and 20% in bonds for a bit of defence. In the last year, what you’ve seen, interestingly, is equities have generally done incredibly well and bonds have been in the teeth of this very fierce sell-off. So, that portfolio I 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 align 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. Of course, 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 one that you’re not comfortable with.

And finally, on our list of golden rules, is not giving up.

As investors, we’re all going to make mistakes. For me, it’s important to not make the same mistake twice, and don’t beat yourself up about it. It’s all part of the learning process. The important thing is to invest for the long term, and if you do have the money to invest, to not leave it in cash over long periods because all the historical data shows that if you do that, it’s going to lose its value in real terms to inflation.

Dave Baxter: Yeah, and hopefully you get to enjoy yourself on the way as well because it is a very interesting thing to get into.

Kyle Caldwell: Yeah. I mean, we both invest ourselves and we both enjoy doing it. I think if you are more of a hands-on investor learning about investing, you can pick up the bug pretty quickly.

And I’m sure our listeners who tune in regularly, they love investing, and they want to learn more and more.

Dave Baxter: Yeah.

Kyle Caldwell: 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 at: otm@ii.co.uk.

As ever, there’s lots of insightful investment and pension articles on the interactive investor website, which is ii.co.uk. We’ll be back as usual next Thursday, so hopefully we’ll see you then.