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How I invest: Switching to funds after mistakes with individual stocks
Picking individual shares can be a good investment strategy for an experienced investor who has a strong understanding of the stock market and has the time to do their own research.
But none of us can get it right all the time and even investors like Alan from Fife, who has been investing since the 1970s, can sometimes make mistakes.
He has been able to pick some winning shares with pharmaceutical giant AstraZeneca (AZN) and ethical fund manager Impax Asset Management (IPX:AIM) generating returns for Alan of 71% and 69% respectively, but there also have been shares which have lost him money, including over 50s insurer and cruise operator Saga (SAGA) with an 87% loss.
Around three years ago Alan decided to switch his investments from stocks to funds, which he says has ‘greatly improved’ his returns.
On why he decided to make the switch, Alan says: ‘I was making too many mistakes when investing in single UK stocks. Government regulation, poor governance and management, profit warnings from previously well performing companies are pretty much not on the radar of the smaller investor.’
FOCUS ON TOP QUARTILE PERFORMING FUNDS
His strategy now is to invest in funds which have provided top quartile returns over periods of three, five and 10 years.
After a career as an IT analyst and outsourcing service delivery manager, Alan has been retired for nine years, owns his own home, is debt free and now able to start off investment portfolios for his grandchildren from surplus income. His main investment goals are to ‘not lose money’ and be ‘as tax efficient as possible’.
Alan holds investments in a SIPP, ISA and Capital Investment Bond. He says, ‘The tax relief in pensions investing alone gets any investment off to a great start. My initial aim was to make sure our children could go through their early life free of further education debts and help them with starting up their own adult life. I’m fortunate now in being able to contribute to our grandchildren’s future.’
Tracking the top performing funds and investment trusts has ‘transformed’ growth in his ISA and SIPP funds, Alan says, with his best performers being Baillie Gifford US Growth (USA) and the SL Baillie Gifford American Life Fund, followed by Smithson Investment Trust (SSON).
Over the last three years Alan had taken note of several US growth stocks but for a UK investor to invest in these stocks directly requires US regulatory paperwork to be completed, but Alan viewed a number of US-focused funds and investment trusts as a ‘no fuss’ way to gain exposure to these stocks.
BIG GAINS FROM US TECH
At the beginning of 2020 Alan says it was clear to him that the ‘Big Tech’ companies were likely to experience ‘exceptional growth’ during the pandemic and lockdown.
After spending time on investment trust and fund ranking tables, he found most of the top performers were predominately invested in North America, covering a large number of the North American companies he had previously wanted to invest in directly.
Making sure the fund and its managers had ‘good long term track records’ before investing, Alan says some of his North American funds have consistently made 20% to 30% average annual gains over three, five and in some cases 10 years.
However, he feels now is the time to diversify the North American and ‘Big Tech’ tilt to his investments and has sold the rest of his single stocks that ‘at best had mediocre gains (if any)’, with a move to Asia – albeit also in ‘Big Tech’ – given the region looks like ‘coming out of the pandemic quickly’ and included biotech and sustainable sector investments.
SEEKING DIVERSIFICATION AND KEEPING ON TOP OF PERFORMANCE
Alan thinks Asia looks to be ‘well ahead on managing its way out of the Covid-19 pandemic’ which in his view should ‘result in strong economic growth 12 to 18 months ahead of the UK, Europe and North America.’ He also says it was ‘high time to diversify the geographic split of my investments and reduce risk.’
Alan spends a lot of time when managing his investments looking at the ranking tables for his funds. He suggests any investor, ‘especially those who pay people to look after their investments’, check where their funds appear in the ranking tables and adds, ‘Why would anyone have money in a fund that has had negative returns, consistently, over the last 10 years?’
DISCLAIMER: Please note, we do not provide financial advice in case study articles and we are unable to comment on the suitability of the subject’s investments. Individuals who are unsure about the suitability of investments should consult a suitably qualified financial adviser. Past performance is not a guide to future performance and some investments need to be held for the long term.
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DISCLAIMER: Editor Daniel Coatsworth owns shares in Smithson Investment Trust referenced in this article.