The £50,000 challenge – Damien’s portfolio

One of the biggest problems with the world of finance is that people just don't have 'skin in the game'. Funds are often run by managers who don't have significant stakes of their own fortune invested in their own funds. Research has shown that when fund managers invest their own money, as opposed to their clients' money, they take less risk.

80-20 Investor is the culmination of a career in investment research and analysis. 80-20 Investor was deliberately designed to allow experienced and novice investors to build portfolios to maximise their returns from minimal effort. Of course you have a wealth of articles , my data analysis of tens of thousands of funds by sector as well as our Best of the Best picks.

However, a number of you have asked me 'what funds would you pick?' or 'how would you use 80-20 Investor?' While obviously 80-20 Investor provides information and not financial advice it is an interesting point.

So I am launching a new portion of 80-20 Investor at no extra cost to you. From 1st March 2015 I am going to run my own portfolio live on the site.

• I am going to invest £50,000 using 80-20 Investor
• I will regularly update you with my progress
• I will show you how I get the best from 80-20 Investor and the features I use
• I will show you how I build a portfolio and...
• How and when I decide to sell funds

Hopefully, it will help answer a lot of the questions you may have when running your own money.

A brave man

I am a brave man as I am investing my money right at the point when stock markets are at all time highs. Is that because I think markets are only going upwards? Far from it, if anything they are due a correction.

However, this is a long term project and I expect to be down initially but to outperform the market over the long term. A sensible strategy would be to drip the funds in over time (i.e. put in £10,000 a month) to minimise the impact of a market correction. But as I say I am investing for 10 years plus so am comfortable taking risk and short term falls. Remember it is a paper loss unless I crystallise it. in any event I plan to keep an eye on my stop losses.

Building my portfolio

So I am starting with £50,000, but where do I start?

A good starting point is the 'age guide'. It is a broad rule of thumb but is widely used within the asset management industry. The guide is that a medium risk investor with a medium to long term time frame (5-10 years) should have at least a percentage of their portfolio equal to their age in low risk investments. Low risk investments include assets like bonds and cash.

If you want to see the sort of funds and sectors that are low risk then go to the Best of the Best Section and click on the low risk tab.

So for me that means somewhere between 30% and 40% of my portfolio in low risk funds. To start with I am going to go with around 30% as I am on the more adventurous side of balanced.

That then leaves me with 70% of my portfolio to deal with. I plan to split this 30% in medium funds and 40% in higher risk funds.

What funds to buy?

One self imposed criteria is that initially I am only going to buy unit trusts as the fund platform I am using offers limited choice when it comes to investment trusts and ETFs.

Yet this is fine as unit trusts are exactly the sort of investments most of you guys buy. In time I will likely move fund platforms so that I can invest in investment trusts and ETFs.

The next stage is to choose the types of assets (you can think of this as the fund sectors) to invest in. The important thing to point out is that my initial fund selection is not going to be the one that makes me money in the long term. Think of it like a garden, my initial fund choice is like starting with a barren garden. To get it to flourish I will sow the seeds that hopefully should grow given the weather conditions. Of course I've also got half an eye on the long term (i.e. what season we are in). Initially you might not be impressed with my choices.

However, with constant watering, weeding and pruning in time things should flourish. If we could jump forward a number of years to see the results you'd be shocked. But like gardening investing takes patience.

Watch out for bid/offer spread

Buying a fund is much like buying a car, the price you pay can depend upon where you buy it. So when choosing my funds I was careful to ensure that there was no bid/offer spread on the funds. A bid/offer spread is where a fund has a different price for those wanting to buy and a different one for those wanting to sell. If a fund has different prices it is said to have a bid/offer spread. A lot of funds these days have a single price which is the same for buyers and sellers. Let's say that is £1. A fund with a bid offer spread might instead have a buy price of £1.02 yet a sell price of 98p. That 4p difference acts like a charge on your investment and means that you would have to make up the 4p before you broke even when you sold out (4p equates to around 4% in this example).

So before settling for a fund I check whether I could buy the funds at a single price with no bid/offer spread. Only one of the funds which I have picked had a bid/offer spread but if was fractions of a percent, rendering it negligible. Of course it could widen however it is unlikely to given that the fund in question is huge in size. Bid/offer spreads tend to widen in thinly traded markets and within assets/funds with few buyers and sellers.

How many funds will be in my portfolio

There's an obsession with the number 10 when it comes to picking funds. Investors seem to simply divide the sum they have to invest into 10 funds to diversify. What they end up doing is buying multiple funds of a similar type (such as UK Equity funds) to hopefully minimise the impact of any one fund underperforming. Not only do they often fail to do this, as a lot of managers simply track the market so they don't get fired for underperforming, but they also minimise the impact of a fund which is outperforming.

As I'm going to keep an eye on the stop loss alerts I'm happy with investing in just 7 funds. This number is not set in stone and I may increase or decrease that number in future.

My low risk funds

I am letting the 80-20 Best of the Best selection influence my asset allocation. Let's start with the low risk funds.

There's an interesting mix in the current Best of the Best selection with some managed funds (those belonging to sectors like 'Mixed Investment' 0%-35% Shares') which have some exposure to shares but mostly invest in bonds. There is also a Targeted Absolute Return fund, these types of fund try and minimise any downside (unfortunately a lot fail to achieve this). Plus there are also some decent straight bond funds.

I have decided to go with

• JPM Cautious Managed
• Fidelity Multi Asset Defensive

and put £7,500 into each, both of which feature in this month's 'Best of the Best' selection. in particular I like the Fidelity Multi Asset Defensive fund for reasons stated in my article Funds to ‘buy & forget’ in 2015 & the Perfect Portfolio.

I picked the JPM Cautious Managed because out of the low risk Best of the Best funds it has had the lowest drawdown in the last 6 months, plus it is not overly expensive. Part of the reason for its recent strong performance is its exposure to a broad range of global equities and bonds.

My medium risk funds

My fund picks are

• Fundsmith Equity
• Majedie UK Income

and I've put £7,000 into each. If you read my research piece Stock markets at all-time highs, where next & should you buy? you will know that despite the US market having a very strong run it appears to be in a bullish pattern. Similarly there is scope for Japanese equities to move upwards. Fundsmith Equity is a global fund but actually has about 60% exposure to US shares. It has a terrific track record and is run by a chap called Terry Smith who backs his convictions. The fund only has 28 different stocks which is very low for a fund (most have 2-3 times that). The fund also appeared in the Best of the Best Selection last month.

I'm not wholly convinced on the fortunes of the UK stock market given its unconvincing run up to its all time high. Yet I'm interested to see that UK fund's have been flirting on the edges of entering the Best of the Best section this month, in particular the Majedie UK Income fund. However I am happy to take a punt on it this month to diversify my holdings.

My high risk funds

My fund picks are

•  Jupiter European
• Neptune Japan Opportunities
• AXA Framlington Global Technology

with £7,000 in each. The sectors cropping up in this month's Best of the Best high risk funds include Chinese equities, European equities, Japanese equities, Technology and Property.

The 80-20 Best of the Best funds has pulled through a Japan fund for the first time since its been running. Clearly there is momentum there but I'm going to choose to play it via Neptune Japan Opportunities. As mentioned in the article which I linked to above, the strength of the Japanese currency (Yen) and its stock market tend to move in opposite directions. When the Yen is weak, exporters get a boost and the stock market rallies. Given that Japan is still in full monetary easing mode I want a fund that removes exposure to the Yen, which is why I've picked Neptune Japan Opportunities.

As I highlighted in my research piece Buyer beware this Chinese New Year Chinese equities tend to perform better in the second half of the year so I am going to hold off investing for now. Of the remaining sectors I am more keen on European equities despite the potential problems surrounding Greece and Ukraine. Eurozone QE is about to officially launch and should provide support for European shares.

Meanwhile, technology stocks have been performing well. While they are due a breather there's certainly no denying they have upward momentum right now.

Final portfolio

So my final portfolio looks like this:

• JPM Cautious Managed - £7,500
• Fidelity Multi Asset Defensive - £7,500
• Fundsmith Equity - £7,000
• Majedie UK Income - £7,000
• Neptune Japan Opportunities - £7,000
• Jupiter European - £7,000
• AXA Framlington Global Technology - £7,000

It's pretty bullish to start with, but as I said before we can trim and weed as we go. I also must add that all of the funds are held within a Stocks and Shares ISA wrapper to eliminate any tax liability upon future fund switching.

What's in your 80-20 Portfolio?

Now you've seen what is in my portfolio, feel free to tell me what is in yours. The beauty of 80-20 Investor is that it is not prescriptive and empowers you to design your own portfolio. I would love to hear what you are investing in and how it's going. Feel free to discuss this in our new chatterbox section.