How we invest and lessons learnt

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We’ve all been there and made some investing mistakes. The good news is that there are ways to limit any impact, such as by having a diversified portfolio and investing regularly. In this episode, Kyle and Dave explain how they have invested over the years, running through the lessons they’ve learnt, and offering pointers on how to build a portfolio.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to On the Money, a weekly bitesized show that covers investments and pension topics that aim to help you make the most out of your savings and investments.

In this episode, I’m joined by Dave Baxter, senior fund content specialist at interactive investor. Dave, welcome back to the podcast.

Dave Baxter, senior fund content specialist at interactive investor: Thanks for having me on.

Kyle Caldwell: So, Dave, the topic we’re going to cover today is how we’ve both invested over the years and the lessons that we’ve learnt. In doing so, we’re hoping that this episode will provide plenty of food for thought for investors at different stages of their investment journeys.

To kick off, I want to cover the main fundamentals that should ideally be in place before making a first investment. So, for those thinking of making their first investments in 2026, first, it’s very important to have a plan in place. This involves setting goals and objectives, thinking about why you’re investing the money, and the sort of timescale that you can afford to invest the money for, as this will help shape the types of investments that you then consider investing in.

Dave Baxter: Yeah. I guess there are few other basic considerations. One is the tax wrapper you’re using.

Most people are using ISAs or self-invested personal pensions (SIPPs). Given that the SIPP can’t be accessed until your 50s, that can potentially be a kind of longer-term, [with] maybe slightly riskier prospects, whereas in an ISA, you might suddenly need to use it for some reason a few years down the line. So, you might want to take a slightly more balanced approach and have a bit less risk.

Kyle Caldwell: A key test to pass before you start investing is to establish an emergency fund. This is ideally three to six months’ salary in an easy access savings account, so that you can dip into that money if you need it. For example, if your boiler breaks, you can then dip into the cash savings to fix it.

One reason why you’d have an emergency fund is because if you don’t have any cash savings in place to pay for an emergency, then you may end up selling investments at a disadvantageous time.

Dave Baxter: And on the flip side, even when things are going well for your portfolio, say things are racing ahead, there’s that adage of ‘don’t get in the way of compounding’. So, you want to keep as much invested as you can and then it will grow over time and do better for you.

Kyle Caldwell: I also think it’s important to consider what type of investor you are. You might know this before you start investing but think about how committed you are to regularly reviewing your investments, and how often you are willing to stay on top of them.

If you’re a more hands-off investor, that’s completely fine. If you do fit into that sort of category, there are certain types of funds that are more suitable.

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Dave Baxter: Yeah. It’s worth touching on a few options and there are multiple choices out there for you. Interactive investor for example, does a Managed SIPP, but also if you’re looking to the fund space, you have well-known franchises like Vanguard LifeStrategy, which we will discuss later of course. You have rivals like BlackRock’s My Map. And you could potentially - this is slightly less hands-off - pick a few broad trackers yourself and pair them together.

Kyle Caldwell: The other thing to think about is risk. This is a very broad topic, so we’re only going to cover this very briefly now. One thing I would think about is how willing you are to tolerate a potential loss and weigh up risk and rewards.

If you’re a more cautiously inclined person, then you might not want to invest in a more adventurous-type fund, such as a fund that invests in emerging market shares, for example.

But there’s also a risk of being overly cautious, particularly if you are at the start of your investment journey, say in your 20s or 30s. You’ve got such a long time to ride out the inevitable ebbs and flows that come with stock markets.

Over time, as you’ve mentioned, Dave, compounding should do its thing. At the end of the day, if you look at all the historical data, it shows that the best way to grow wealth over the long term is through investing rather than leaving it in a bank account because, over time, inflation erodes the returns that you get on cash savings.

Dave Baxter: Yeah. And of course, there are things like regular investing, which can help offset the ups and downs of markets. So, you need to [take] as much risk as you can tolerate and then hold your nerve.

But it is interesting, the whole point about how much risk/volatility you can take because some people only find out when they are actually start investing and then markets go one way or another, and they perhaps adapt their approach as they go on.

Kyle Caldwell: Another way to manage risk is by having a diversified portfolio. This involves investing in a mix of different types of funds that invest in different areas, countries, and sectors, but also different asset classes such as shares, bonds, alternative assets, and maybe even property.

If you have a diversified portfolio, over the long term, this helps to [mitigate] risk, but it also gives ample opportunity for your portfolio to grow and to, hopefully, grow in real terms, and beat inflation.

Let’s now move on to how we’ve both invested over the years. I’ll kick us off.

The first thing I did was in regards to my pension. I won’t be going into details about how my pension’s invested today. Instead, I’m going to focus on my stocks & shares ISA, purely for time constraints with the podcast.

However, the first thing I did when I was 22/23 was to take a good look at the pension default fund that I’d been put into. This was around a year after I started employment. I was really surprised to see that it was a balanced managed fund. So, it had 60% in shares, and 40% in bonds. In my early 20s, I didn’t think it was appropriate to be invested in a fund with 40% in bonds. Such investments are very defensive; that’s where they sit in a well-diversified portfolio.

But with a potential 35- to 40-year time frame, for my pension at that point, I could be much more adventurous. So, I switched it so that I had a 100% in global shares.

Dave Baxter: Yeah. This is a common pitfall and one that I actually did fall into a few years ago. So, many years ago, this must have been before auto enrolment because it was the first company I was working at that had a pension scheme.

At the time, I was quite pleased with myself because I’d maxed out my contributions, so I think I was contributing 6%, something like that, and my employer was double matching it, which was incredible.

But I didn’t look into the pension at the time, and then it was only a few years down the line that I had a look and realised I was in one of these balanced funds. This was a period when you’d have huge gains for equity markets, so I’d missed out on even greater gains.

So, it is really important for people to take the time to look at what they are invested in and, as you say, max out that risk because you’ve got so long to ride those ups and downs.

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Kyle Caldwell: I’ll now move on to how I invest my stocks & shares ISA. I started the ISA around 13 years ago. In a former life, I was a personal finance reporter covering investments at The Daily Telegraph. We regularly ask fund managers at interactive investor, and indeed I did at the Telegraph, whether they have skin in the game, whether they personally invest in the fund or investment trust that they manage.

I think with the job I do, it’s important that I have skin in the game as well. So, I started off by investing in a small handful of actively managed funds. I’m clearly at an advantage as I interview lots of fund managers. I’ve interviewed hundreds of fund managers over the years and I’ve covered investment for 15 years now.

There’s lots that can be said in the debate about owning an actively managed fund, one that’s managed by a professional investor, and just simply owning the market through an index fund or an exchange-traded fund.

There’s thousands of funds. There’s far too many, and that can be pretty daunting, particularly if you are a beginner investor. But I feel they both should have their place, and warrant their place, in lots of portfolios.

I think mixing and matching between active funds and index funds or ETFs is a suitable strategy for lots of investors, and that’s what I do myself with my own personal investments.

Initially, I did just have a handful of active fund managers - all fund managers that I’ve interviewed over the years. I felt like each fund manager that I chose had a clear investment philosophy and they had strong performance over various time frames.

Obviously, with an actively managed fund, you don’t know from the outset whether the performance is going to continue, whether that fund manager will, in future, outperform the wider market.

But one thing in common between all the five funds that I initially picked is that I felt each portfolio was sufficiently different from the benchmark, the wider market that they were aiming to beat. So, I felt that there was plenty of scope for the fund manager to outperform and add value.

The funds that I initially invested in were Scottish Mortgage Ord (LSE:SMT), Fundsmith Equity I Acc, Marlborough UK Special Situations, and I also had a couple of emerging market/Asia-focused funds and investment trusts, as I wanted my portfolio to have exposure to those fast-growing economies that have favourable demographics, a growing middle class.

I feel like over long time periods, that adventurous area, it is riskier, but I think if you’ve got a long-term mindset, it can be particularly rewarding. So, that’s what I chose when I first started investing.

How about yourself, Dave? What was your first foray into the world of investing?

Dave Baxter: So, I’ve had quite a different path to you. The first thing to say is I’m very impressed that you started 13 years ago because I only started about five years ago.

I basically spent, like a lot of people, a relatively long time building up a deposit for a flat and there’s the rule that you shouldn’t really invest unless you have, say, at least roughly five years to ride those ups and downs. So, I didn’t bother investing for a long time, bought a flat, and then built up some emergency savings again.

Finally, we got to 2020, and so [many people] had more savings because you’re stuck indoors and markets were doing some quite interesting things. It was a very interesting time to watch what was going on.

So, we got to April 2020 and I started investing, which proved very beneficial because markets surged for a long time. But I went in a different direction to you. I went with one of the Vanguard LifeStrategy funds - the 80% Equity A Acc fund - and I did that for a handful of reasons.

One is, as you mentioned, some active funds can do really well, and you can mix and match passive and active. But I had seen enough research and data showing that active funds have struggled to consistently outperform, so I thought let’s just go for a diversified take on the markets.

Also, it was kind of a psychological thing because I love writing about funds and analysing funds, but I wanted to not have to do that outside of my day job as well.

I thought if I buy a really widely spread tracker fund, then I shouldn’t really have to think about it and then I can just ride the market and, as I believe we’ll discuss, there are also some interesting structural features to the LifeStrategy range, which sets it apart from some other widely followed tracker funds.

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Kyle Caldwell: So, there are five funds in the Vanguard LifeStrategy range. The equity content varies from 20% up to 100%. Was there a particular reason why you went for the 80% version?

Dave Baxter: So, this was an error, I suppose. Basically, despite focusing a lot on funds and knowing quite a lot at that point already, I was slightly swayed by a good friend of mine who had also start investing and had gone with LifeStrategy, also 80% Equity. He was perhaps a bit more squeamish about the ups and downs of markets and didn’t want so much volatility.

I guess I was just focused on getting started with investing and I thought it made sense to have a bit of a kind of buffer. But, in hindsight, I’m in my 30s and I didn’t really specifically need the money for anything, I just wanted to start investing, I should have gone into 100% Equity A Acc and taken on as much risk as possible. So, it’s a small area and it wasn’t a massive problem, but it will have limited some of my returns over that especially strong period.

Kyle Caldwell: As you’ve alluded to, there are certain features in the Vanguard LifeStrategy range that some people view as a bit contentious. One of those is that the Vanguard LifeStrategy funds have a home bias towards the UK. How did this come into your thinking when you chose that fund?

Dave Baxter: I quite like that feature because as we’ve discussed and written about to death, the MSCI World Index, say, has something like 70% in the US, so there’s a lot of risk associated with if something goes wrong for a Mag Seven and so on. By contrast, LifeStrategy, I think, has about half its equity content in the US still, but you’ve got a quarter in the UK.

So, I just quite like that because I think it diversifies you away from that main market a bit and, interestingly, if you look at the data, the home bias so far hasn’t really held LifeStrategy back that much. Even when the US has been soaring ahead, it’s still done pretty well. Then last year, when the US lagged, it did especially well.

Kyle Caldwell: I have a very slight bee in my bonnet over the home bias only because when I’ve asked Vanguard previously as to why the range has a home bias, the response I received was that they’d surveyed investors and potential new investors, and found that investors like to have a home bias. So, that’s sort of led the decision-making process in terms of why the range has a home bias. It feels like it’s been built in because people have said that’s what they want rather than it being that that’s what they should have, or ideally, need to have.

Dave Baxter: I wonder if it’s a nakedly commercial decision because if you look at that market, there already would have been something like an iShares MSCI World Tracker. So, they have a lot of money, it would be very hard for Vanguard to come in and beat them on scale and undercut them on price. So, I guess they’re doing something deliberately slightly different and distinctive and that does seem to have struck a chord with people if you look at how much money is going into that range.

Kyle Caldwell: So, let’s move on to how our investments have evolved over the years. I’ll go first.

So, as mentioned, I started investing around 13 years ago. However, along the way, I needed to sell some of my investments.

I needed to sell some of my holdings when I got on the property ladder, and a couple of years ago, I sold the entirety of my stock & shares ISA as we were going through a property renovation, and I needed to use the money to help fund it.

However, what was really pleasing was the fact that some of my investments had performed really well for me over the period that I’d held them. Two being Scottish Mortgage and Fundsmith Equity.

They both beat the wider global stock market over the period that I held them, and they beat it quite convincingly as well. So, that was very pleasing because, obviously, with an active fund manager, that’s what you want. You want them to add value for you over the alternative, which is buying the market for a very low fee.

I started building my stock & shares ISA back up again a year ago. When I reflected on how I’d put the portfolio together initially and how I’ve put it together now, one thing I’ve changed is that I have a global index fund alongside a global actively managed fund.

So, a lesson I’ve learned is that I did potentially overlook the benefits of global index funds or global ETFs as part of a diversified portfolio. My portfolio now is much more of a mix and match between active funds and index funds/ETFs. And again, what I’ve done is own a handful of different funds and investment trusts. I’ve bought Scottish Mortgage again.

Since I sold Scottish Mortgage, the lead fund manager, James Anderson, is no longer the lead manager. However, Tom Slater was the deputy fund manager of Scottish Mortgage for a long time and worked very closely with James Anderson. The investment approach hasn’t changed. The focus is very much on finding disruptive growth companies and [investing in] companies that are listed as well as private companies. I really like that aspect because you can’t buy those companies yourself. 

As I mentioned earlier, one thing I really look for is that the underlying portfolio and how the fund manager invests is very different from the wider market.

If you’re trying to find those active fund managers that outperform – of course, there’s no guarantees – but if they’re looking too similar to the index, then that’s what you’re going to get. You’re going to get a return that is very similar to the index, and you can achieve that by paying less and just buying the index.

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Dave Baxter: Yeah. It’s interesting, isn’t it? If you look at quite a lot of global equity funds, they are still very heavily weighted to the Max Seven stocks. So, it is quite hard to get away from.

Kyle Caldwell: In common with how I put the portfolio together 13 years ago, I still have exposure once again to Asia Pacific and the emerging markets.

I’m investing my ISA now on a 15 to 20-year time frame. I’m looking to build this ISA to have it alongside my pension, and to potentially draw from the ISA earlier than when I can get my hands on the pension money, which, well, it’ll be in my late 50s by the time I get there. Because I’ve got such a long-term time horizon, I’m willing to invest adventurously in pursuit of potentially higher returns over the long term.

So, Dave, how has your portfolio changed over the years?

Dave Baxter: I also ended up cashing out of my ISA. That was a couple of years ago. It was for boring reasons and fun reasons. I ended up moving flat, which had associated costs and, frankly, I had some very fun and large holidays, and some fun money.

So, I need to get my ISA going again this year and that’ll be interesting.

I probably as a base will do something very similar. I imagine I will go for a LifeStrategy fund again for now, but I will learn from my previous mistake and go for the 100% Equity fund rather than 80% Equity fund.

Given some of the things you said earlier, it did get me thinking. I guess one drawback with something like LifeStrategy, as with many widely followed trackers, is you’re not really tapping into things like emerging markets.

So, maybe I would need to build a base with that one fund and think about adding some of the other areas. I haven’t completely lost faith in active funds as well, so perhaps I could look at some new satellite holdings over time.

But it’s just avoiding the mistake that many investors make of adding many different holdings and ending up with this sprawling, unmanageable portfolio.

Kyle Caldwell: Well, let’s now move on to investment lessons. I’ll start with a few things I’ve learned over the years.

When I went through the portfolio earlier and named some funds I’d held, I did omit one, which was an absolute return fund. I omitted it because I was going to come on to it now.

So, this one was a mistake. I shouldn’t have bought it with the benefit of hindsight. I made the classic mistake of not fully appreciating how the fund invested and how risky it was.

When I bought it, it all looked great on paper. Past performance is obviously no guide to the future, which I thoroughly learned through that fund. It looked really strong over multiple different time periods.

When I bought it, after a couple of months it fell pretty heavily over that period. It was down around 20%. For a fund, I remembering thinking that it shouldn’t fall that much over a short time period. A fund's meant to give you diversification by investing in lots of holdings - it’s not an individual share. With a share, it’s much more common that that might happen, but not with a fund.

So, I took another look at the fund and after a thorough examination, I realised that I didn’t really understand the investment process. It had the ability to short. Shorting is if a company’s share price falls in value, the fund manager will make money out of that, which is riskier than more conventional methods of profiting from share price gains.

I think over the short time period that I held it, the shorting was the reason for the fund falling heavily. It could be that it had certain shorts in place that didn’t play out. The share prices actually rose rather than fell.

I just made the classic mistake of not fully understanding what I’d invested in, so I swiftly exited. In that scenario, I felt that was better to do rather than try and wait for a recovery to play out because, again, I was just so unsure about its future prospects because I didn’t fully understand how it invested.

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Dave Baxter: In terms of my mistakes, they’re probably what I’ve mentioned in terms of not taking on as much risk as I could have, especially given that I feel like I’m quite comfortable with the ups and downs.

But I did want to mention that I’ve covered funds for a long time, and when I was working on Investors Chronicle magazine, I used to be one of the people who put together the portfolio clinic feature, which is almost like an agony aunt column for investors. People submit their holdings, their portfolio, and they say what their goal is, and then some experts look at how they’re invested.

There are a few very common mistakes I thought were quite interesting. To mention one prominent one, it’s duplication. So, I’ve mentioned that I’m a fan of the Vanguard LifeStrategy funds, but those funds are variants of the same thing. Quite often I would see people holding, say, the 60% Equity A Acc fund alongside the 40% Equity A Acc or the 80% Equity versions, so they were getting this weird duplication and complicating their portfolio more than they should.

Another form of duplication is when people hold US trackers alongside global trackers, or people have direct UK shares, so they hold HSBC Holdings (LSE:HSBA), for example, at a large weighting, but they’ll also hold UK funds that have big exposure there.

So, it’s good to look at what your underlying exposure is because sometimes you do get that overlap.

Kyle Caldwell: When I was putting the portfolio together a year ago, one thing I thought about a lot more was the percentage weightings to each fund that I invest in.

Whereas when I started out, I was a little bit more scattergun and 'I’ll put x amount into there, x into there’. I wasn’t thinking in terms of the percentage weightings.

This time around, I’ve tried to ensure the holdings that I view as core holdings comprise a greater portion of the portfolio, and those that are a bit more satellite, more adventurous, like the Asia-Pacific and emerging market funds that I invest in, comprise a smaller weighting in the portfolio in order to balance risk essentially.

Dave Baxter: Yeah, it’s interesting. We’ve touched on something we published this week. Some of those satellite holdings can race ahead and then actually become quite a substantial part of your portfolio and it makes you a bit too focused on something that’s quite niche.

Kyle Caldwell: The final point I want to make is the importance of not beating yourself up if you make mistakes. Everyone makes mistakes, particularly when it comes to investments. So, if you do make a mistake, the important thing to ensure is that it doesn’t put you off investing and that you don’t make the same mistake twice.

Dave Baxter: Yeah. The biggest mistake, really, is not starting investing or pausing and then not getting back into it.

Kyle Caldwell: I completely agree, which goes back to the point we made earlier about if you invest for the long term, the history books show that investing does tend to beat cash quite considerably over the long term.

There’s no free lunch when it comes to investing, but there are various ways to reduce risk, including having a diversified portfolio, and investing for the long term. As you mentioned earlier, Dave, regular investing can also reduce risk as well.

So, that’s it for our latest On the Money podcast episode. My thanks to Dave, and thank you for listening.

As usual, you can find plenty of insights and practical pointers on the interactive investor website, which is ii.co.uk. We love to hear from you and you can email us at otm@ii.co.uk. I’ll see you next week.