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What I’m looking for as someone who has never invested before

05 October 2018

FE Trustnet reporter Henry Scroggs discusses his journey of investing for the first time and reveals his six fund picks.

By Henry Scroggs,

Reporter, FE Trustnet

As a 24-year old first-time investor in the current climate knowing whether to invest – let alone what to invest in – is not easy.

For the past few weeks, I have been writing a series focusing on the factors you should consider before investing for the first time and now, I am applying what I have learned to help me buy my first funds.

I will start by repeating something I said in an earlier article, which I have personally found holds true. “Investing for the very first time can be quite a daunting prospect.”

While I have managed to pick out six funds and create my first portfolio, which you can find at the bottom of this article, first I want to go through my thoughts on how I have found the process.

I’m part of a generation of people who have less money than our parents did at our age and struggle to pay rent plus living costs, let alone put aside money to invest in financial markets.

I can promise you – it is not for an overindulgence of avocadoes either.

For those that have enough money, they are often put off investing because they don’t understand it, while there are those people who simply aren’t interested and would rather spend their money on something else.

But investing is clearly an important thing to do and, as a young person, I have one key advantage over everyone else: time.

The sooner we start investing, the more money we should theoretically make in the long term if the history of financial markets is anything to go by (and provided we don’t invest irresponsibly).

I am already enrolled in a workplace pension scheme and benefit from my employer’s contribution as well as government tax relief but I have decided to use some of my personal savings to self-invest.

Having written about funds and investments for six months at FE Trustnet, I have noticed one of the common themes that fund managers and investment professionals are discussing is the end of the cycle, and more specifically, when it will come.

The expansionary stage of the economic cycle we are currently in has been going on for longer than the average seven years and is part of what is now the ‘longest bull market in history’ and more notoriously ‘the most-hated bull market in history’.

Although some say it may not happen for another year, two or even three, there are other experts who have been calling the end of the cycle for some time now.

But we all know that it is notoriously difficult to time the market and predict when it will hit the bottom.

I am aware of this and I understand that the best way to invest is drip-feeding small amounts of money every month to smooth out the ups and downs of markets.

Nonetheless, I couldn’t help but hesitate to invest in the current climate with some signs pointing to a change in the economic cycle in the near future and the effects of the global financial crisis still looming over ‘the most-hated bull market in history’.

I don’t want to invest today and wake up tomorrow to find out that global stock markets have tanked 40 per cent like some did during the crisis.

A part of that is fear, but the larger part is greed and wanting to give myself the best start possible.

If such a situation happened the day after I invested, I understand that markets would likely rise above and beyond the crash as they have done historically.

So, I’m not worried about losing money in the short term. But since I am not already invested in the market and I don’t already have a buffer of 10/20/30 per cent of portfolio returns to cushion such a blow, I initially struggled to get over this hurdle.



There is a note that Premier Asset Management’s multi-asset fund manager Simon Evan-Cook wrote a year ago, which I think perfectly demonstrates my dilemma.

He used the below chart to illustrate this. Please note, it is neither a forecast nor a guarantee, it is merely an illustration and represents only a very small number of possible outcomes.

 

Source: Premier Asset Management

The dotted line is a projected level of inflation using the 2.7 per cent CPI figure that existed at the time of Evan-Cook’s writing.

This is the minimum that investors should want to beat so their purchasing power doesn’t fall behind inflation and they become poorer in real terms.

But I want to invest for 30 or 40 years in a near-enough 100 per cent equity allocation and so I’m aiming for a much higher return.

My dilemma lies in the green, blue and orange lines in the chart.

The green line is if you invested just before a market correction and stayed invested throughout while the blue line is if the market correction never came and your investment kept rising.

This is a possible outcome and is often the object of that dangerous phrase you’ll hear people saying whether they’re central bankers or investors; ‘This time is different’.

Finally, the orange line is the root of my troubles. It represents an investment if you had not invested until after the market correction and successfully timed the market – “the perfect scenario” as Evan-Cook put it.

As such, realising that it may still be one, two, three or however many years until a correction, and that I could be missing out on potential gains, I decided to take the plunge.

I mean, since my investment time frame is over 30/40 years, I will have plenty of time to recoup any losses in the short term, right?

 

Which funds did I buy?

Because of my long time frame, I have decided to invest fully in equities through a portfolio of six funds.

I took the core and satellite approach, where 60 per cent of my portfolio will be split evenly across two core funds and the remaining 40 per cent evenly across four funds based on certain themes or regions.

The first core holding is Lindsell Train Global Equity, a concentrated, growth-oriented, low-turnover fund run by two experienced FE Alpha Managers; Nick Train and Michael Lindsell.

I like the managers’ low-turnover, high conviction style and believe it is a fund that over the next 10 or so years will continue to outperform.



While it has an underweight to the US (35 per cent), it gives me a healthy allocation to UK companies (25 per cent) including some of the larger-cap stocks that are tapped into global markets.

My next core fund is Vanguard FTSE Developed World ex-UK Equity Index, which tracks the FTSE Developed World ex-UK index.

Also a global fund, it allocates over two-thirds to the US and will boost my exposure to the top-performing country.

I chose to not include UK exposure because I didn’t want to have a home bias and the passive aspect means that it is a low-cost fund that I will hold for 20 plus years.

My portfolio’s performance if I invested 3yrs ago

 

Source: FE Analytics

Moving on to the satellite part of my portfolio, I have allocated 10 per cent each to four funds that are based on different themes or regions.

The first of these is a passive fund, L&G Global Health & Pharmaceuticals Index, which tracks the FTSE World Health Care index.

I picked this based on my belief that the area of healthcare and biotechnology is a long-term theme that will become increasingly important in the future.

Although some of its healthcare and biotech peers have performed very well, others haven’t. I struggled to pick an active fund here so I chose this fund, which, despite being passive, is still a top-10 performer in the IA Global sector over 10 years. Again, it is a fund that I plan on holding for a very long time.

Next, I picked Baillie Gifford Japanese Smaller Companies to tap into the high-growth Japanese market.

Baillie Gifford has a growth focus across its range of funds and runs them with a good degree of success, so I wanted to have at least one of their funds in my portfolio.

I have chosen to go for a Japanese smaller companies fund because this is an area that is under-resourced and one which active managers can really outperform the market compared to other regions of the world.

I then chose First State Asia Focus, which will give me exposure to both emerging and developed markets across Asia.

Although the fund launched recently in August 2015, co-manager Martin Lau has run successful mandates at First State for a number of years.

I chose an Asia-focused fund instead of an emerging market focused fund because it still includes some emerging markets in its investment area such as China, Taiwan and South Korea, which in my opinion will perform better in the long run than the likes of South Africa, Russia, Brazil.

Finally, Merian UK Mid Cap makes up the last 10 per cent of my portfolio. I have picked this fund because UK small- and mid-caps is another area where active managers can outperform.

The manager, Richard Watts, has been in charge since 2008 and has seen the fund to some of the IA UK All Companies sector’s strongest gains in that time.

I like the fund because the Merian UK equities team makes use of the different managers through their collegial approach with each covering different areas.

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