Effective Investing

by Mark Dampier

  Effective Investing

  A simple way to build wealth by investing in funds

  Mark Dampier

  Contents

  About the Author

  Chapter 1. Introduction

  Chapter 2. The Basics of Investing

  Chapter 3. Getting Started

  Chapter 4. Narrowing the Field

  Chapter 5. How to Pick the Best Funds

  Chapter 6. Building and Managing Your Portfolio

  Chapter 7. How I Invest My Own Money

  Chapter 8. Other Ways to Invest

  Chapter 9. Reflections on a Three-Decade Career

  Chapter 10. Final Thoughts

  Acknowledgements

  Appendices

  Publishing details

  About the Author

  Mark Dampier has been head of research at Hargreaves Lansdown, the UK’s largest independent stockbroking firm, since 1998. He has been in the financial services industry for 32 years, initially working as an advisor helping individual clients to invest their money. He holds a BA Honours degree in Law. Mark has become one of the best-known and most widely quoted figures in the fund management industry. He writes a weekly column in the Independent on funds and markets and regularly comments in the national press and on broadcast media. This is his first book (and, he swears, definitely his last!). In his spare time, depending on the season, you will find him shooting, skiing, sailing or fishing.

  Chapter 1. Introduction

  “Where should I invest my money?”

  I have lost count of the number of times that I have been asked this question over the years. It certainly runs into the tens of thousands. I think my mother was probably the first, more than 40 years ago. Today, as head of research for the UK’s largest fund and stockbroking firm, my job is to help find answers to that question for more than 730,000 clients.

  It is clear to me that there is more demand than ever for help in making good investment decisions. One reason I hear almost every time I meet a new client is that he or she has had a bad experience at the hands of banks and other traditional financial services providers. I find it hard to think of any businesses that have done more over the years to alienate their customer base than the big banks and insurance companies.

  A succession of scandals, fines and rip-off practices means that most people no longer trust the institutions they would ordinarily have committed their money to in the past. Even if you can afford a financial advisor or wealth manager, it is far from certain that you will find the experience worth the money. The best advisors are very good: but not everyone finds it a rewarding experience.

  People today rightly want better results, better service and a greater say in how their money is managed. Fortunately in the last ten years technology has moved on so rapidly that the dream of controlling your own investments has become a practical possibility for almost everyone. The development of online investment platforms – one-stop websites that enable you to take full control over all your money – is revolutionising the way that money is saved and invested. You will be hearing more about platforms in this book; they are a game-changer for anyone looking to take greater control over their own finances.

  A second reason DIY investing is on the increase stems from the generous tax incentives for investors that governments have introduced over the past 20 years. These make it both easier and potentially more rewarding than before for private individuals to look after their own money. The availability of tax wrappers such as ISAs or SIPPs (DIY pension funds), plus annual capital gains allowances, mean that most people can invest many thousands of pounds a year without having to pay any tax on their gains. The advantages of saving into ISAs and pensions are so great that I urge everybody to take advantage when they can.

  In this brave new world, inevitably there is growing demand for well-researched, independent information and advice. If you are looking at this book, the chances are that you are one of those looking for help. My hope is that you will find much of value in the pages that follow. The aim is to share with you, in plain language, the most important things that I have learnt about investing over the nearly 35 years that I have been working in the field. I believe that anyone can make money from investing if they have the right knowledge and help.

  What to expect

  Like anything in life, you need to put in some work and research to try and get the best out of investing. My book is not intended as a ‘how to’ manual or reference book. There are plenty of those out there and nowadays you can Google so much. It is rather an attempt to give some practical pointers and the fruits of my own experience, including my past mistakes. Whenever possible, I have concentrated on setting out broad principles rather than getting bogged down in technical details, which in my experience can easily deter the reader. If you come across a term that you don’t understand, it is very easy to look up the definition on the internet. I have added some useful links in the appendices.

  Taking control over your personal finances is bound to play an increasing role in most people’s lives as the state rolls back. Governments simply can’t afford to provide everything they once promised their citizens, such as long-term care, inflation-linked retirement benefits and universal healthcare. Not for nothing has the UK recently launched an auto-enrolment scheme to make sure that all employees pay into a pension. How well your investments perform could well make the difference between your having a fun retirement or a dreary one with little money. Investment isn’t boring unless you believe that making money and providing for your future are unimportant. I hope this book might prove to be a stepping stone on that journey.

  My hope is that you will be sufficiently energised by what I have to say to not only start investing, but to find out more for yourself. The fact that investment appears to be such a complicated business is probably one of the reasons UK investors have traditionally turned to property instead – something they can see, feel and touch and has historically been very profitable. However, property is not without its problems. Few property fans seem to dwell on such things as bad tenants, tenancy voids, maintenance problems and repairs. Dealing with all these things has always struck me as far more complicated and stressful than buying an investment fund.

  Investing in funds has been my particular area of professional expertise for many years. I explain why you should think about going down the same route in chapter 3. Picking individual shares, which is an alternative approach, requires a different set of skills and in my experience is a more time-consuming and difficult route to follow. Please don’t let me put you off trying direct investing in shares, however. I just happen to believe that funds are the simplest and most convenient way to invest money, whatever your ultimate purpose may be – be that a pension, a house, a holiday, a family wedding or just personal enthusiasm. It is how I invest my money and also the way that most individual investors do in practice choose to invest.

  The order of content is as follows. First, I look at the basic principles of investing and explain how I think ordinary investors should think about what they are aiming to do. Then I go on to outline the range and types of funds that are available to individual investors and explain why you should look carefully at using a platform to research and execute your investment choices. I also summarise the tax breaks that the government, in its wisdom, offers you as a potential investor. (I know putting the words ‘government’ and ‘wisdom’ close to each other is a bit of a liberty, but these tax-saving benefits, unlike much else that is presented as government largesse, are real.)

  Next I describe some basic steps that will help you choose the best investment funds and combine them to create a well-balanced portf
olio. I summarise what is in a range of starter portfolios I have designed you to help you get started, depending on your appetite for risk. I go on to explain in detail how I invest my own money, with a description of all the largest individual holdings. Then I cover some of the practical issues that arise from the need to monitor and account for your investments. The next chapter explains my thoughts about some other options for investors, including so-called passive funds, investment trusts and buy-to-let property. The concluding chapter sums up the most relevant lessons that I feel I have learnt over the course of my 35-year career.

  Why listen to me?

  Before getting into the meat of all this, you may want to know something about my qualifications for presuming to tell you how to become a successful self-directed investor (or DIY investor, for short). These days, you cannot set yourself up to give investment advice without formal qualifications and personal authorisation by the Financial Conduct Authority, the financial services industry regulator. Quite rightly I would not be allowed to do my job without those qualifications.

  But you may also be reassured to know that most of what I know about the business of investing I learnt not from a textbook but from the university of life. The reason I know that anyone can become a successful investor without any prior knowledge is that I have travelled the full length of that road myself.

  When I came into the industry for the first time, remarkable as it sounds, no formal qualifications were required. Most of the business was unregulated and sales-driven, frequently with disastrous consequences. I got my first job with a financial advisor for no other reason than that he happened to live next door to my mother in Teddington, Middlesex. I am still not quite sure what Kean Seager, the founder of Whitechurch Securities and the gentleman in question, saw in me. (I suspect the main attraction might have been that I was not only keen and interested in investment, but also cheap at the price!)

  The little I knew about investing the day I started was hardly worth knowing. I did have a degree, but it was in a subject, law, that I found stultifyingly dull. After going to law college, I soon decided that spending 40 years doing conveyancing work, which seems to be the fate awaiting most lawyers of my ability, had little appeal. I was on the lookout for something more interesting. Investment turned out to be the answer, and it is a career choice I have never regretted.

  Mind you, in those early years I knew what I most wanted to do, which was to spend as much time as possible on the ski slopes. Skiing was my main interest. On my CV it says I took a “double gap year” as a ski bum (because, to be frank, I enjoyed the first one so much). I had two years of pure pleasure and irresponsibility, something that I think every youngster should be encouraged to try before getting down to serious career work. But all good things have to come to an end, and after two seasons on the slopes and having recently become engaged, I was under pressure from both sets of parents to find a ‘proper job’. The offer to work for Whitechurch Securities therefore came as a welcome lifeline at just the right time.

  From bad times to good

  As things turned out, I was fortunate to start in the investment business just as the UK was coming out of its worst economic crisis since the second world war. The 1970s had been a horrible time for savers and investors. Runaway inflation and penal tax rates had devastated the savings that many of my parents’ generation had built up. The top rate of income tax was 83% from 1974 to 1979 and there was an additional tax of 15% to pay on dividends and other types of investment income. Exchange controls and an insidious regulation called the dollar premium made it both difficult and expensive to invest money overseas. The stock market fell by 75% from its peak in 1972 to its low point in 1975, and the chancellor of the exchequer, Denis Healey, had to go cap in hand to the International Monetary Fund, rather like Greece today, for a humiliating bailout.

  It is hard for anyone who was not around then to imagine how bad it was. But although these miserable memories have faded, they were still very fresh in most people’s minds the day I started work in 1983. I may not have known much about money, but I was very keen to find out more. I read all the specialist investment publications I could lay my hands on, and when I didn’t know something (which was often), I would go and ask my boss. I was lucky that Kean was always happy to share his knowledge with me, as I try to do with those I work with today.

  Having worked as the investment manager of a pension fund run by a bank, Kean knew his stuff and had recently set himself up as what today we would call a financial advisor, helping clients to invest their money and living off the commissions that their business generated. It was a good time to start, as this was still a period when most financial advisors were former life assurance salesmen. They may have had great charm and persistence but they knew almost nothing about investment itself. The competition was therefore none too demanding.

  Although Kean initially expected to do most of his business helping to create portfolios of individual shares and bonds, it soon became clear that the best business opportunity was going to be in picking unit trusts (the first professionally managed investment funds to be specifically designed for the mass market). Although not as popular then as they are today, unit trusts had a number of advantages for both investors and their financial advisors. They were easy to buy and sell and, for the advisor, easier to scale up into a decent business, helped by the improving economic climate of the period.

  As interest rates started to come down, and the economy and stock market began to recover through the 1980s, the business of creating, selling and distributing funds quickly turned into a growth industry and in turn became, as it remains, my personal area of specialism. The other popular product among advisors at that time was something called an investment bond, which were sold by life assurance companies (and paid even better commissions than unit trusts). Like endowments, which in those days many people invested in to help them repay their mortgages, they combined life insurance and an investment fund. The door-to-door salesmen who got people saving in those days were highly incentivised to flog them. However, as an investment option, investment bonds were not as good value as a plain unit trust.

  After several years working and learning on the job at Whitechurch Securities, and an interlude working elsewhere, in 1998 I was persuaded to move across Bristol and join Hargreaves Lansdown, one of Whitechurch Securities’ main rivals. The company had started life in 1981 as a two-man operation run from the back bedroom of Peter Hargreaves’ house. By the time I arrived it was already a profitable and growing business, on its way to becoming the market-leading financial services business it is today. In little over 30 years, HL, as it is widely known, has grown from a small privately-owned company with a few hundred clients to one of the UK’s 100 largest publicly-quoted businesses, with assets under management or administration of more than £55 billion. It has been quite a ride and one in which I have been fortunate to play a part.

  What strikes me today is how lucky I was to find that the principles of sound investment which I had slowly learnt for myself by working with my original clients were also shared by the two founders of HL. That made it an easy transition for me. The very first client that I had at Whitechurch Securities was an ex-military man who was coming up to retirement. (I sometimes joked that I could have invaded a small country with the knowledge and expertise of my original client list, such was the preponderance of former officers and servicemen.) He told me that he needed to earn an income from his investments, but also wanted some scope to make a capital gain as well.

  I did some research and put together a portfolio of the best equity income funds I could find at the time. Three decades later I continue to recommend exactly the same thing for many clients today, as equity income funds remain in my view, for reasons that I shall explain, one of the best building blocks for a wide range of investors, beginners and wealthy alike.

  Simple, but not easy

  Ben Graham is a famous American investo
r who, in the 1930s, wrote the first definitive book about picking shares. He was also one of the first to make the observation that the business of investing is “simple, but not easy”. Although I have had to learn that lesson myself the hard way, it is very much the way I have come to see it too. The opportunity that investors have today to take greater control of their own financial destiny is a hugely exciting and positive development. The only shame is that so many people, while anxious or aware that they need to take a greater interest in how their money is doing, remain daunted by the apparent complexity of the task. It is nothing like as complicated as it sounds.

  I hope to convince you that, while there are no shortcuts to investment success, making the effort can be rewarding. If a former ski bum like me can do it, so can you! Of course, it takes concentration and hard work. You have to be flexible and adapt your thinking to the prevailing climate, taking the rough with the smooth along the way. It is better to build your wealth steadily over a number of years rather than trying to chase instant returns. And yes, there are plenty of pitfalls lying in wait for the unwary. The good news, however, is that the rewards over longer periods of time will comfortably repay the effort.

  Chapter 2. The Basics of Investing

  What is the objective of investing? Most people tend to say something like, “To make as much money as possible”. My answer is different. As I see it, the objective of investing is to improve your quality of life. What you are doing when you start investing is making a conscious decision to put a certain amount of money aside in the reasoned belief that it will be worth more in the future – a little sacrifice today for a lot more gain tomorrow.

  Successful investing is therefore a passport to a better life for your family. It is worth emphasising that you don’t need to have huge sums ready and waiting. What you need is the discipline to save a little regularly. Over the years I have often been told that it was pointless to save small amounts each month; they could never amount to anything. But that is the first and biggest mistake you can make about investing. As we’ll see, time can do wonders for the value of investments, no matter how small they start out.