How even novice investors can beat the market and fund managers with little effort
The purpose of this article is to teach you how anyone can successfully run their own money. Whether you have £10,000 or £2 million the key is to have a process when investing money which helps you decide which funds to invest in.
This article will teach you how to become a better DIY investor as well as the tools to use. I will teach you:
- how to start investing
- what to invest in
- how to know when to invest and when to sell
The lessons are deliberately written in a light and entertaining way using real life examples from the worlds of investing, academia and sport. I strongly suggest you also download the full article so you can refer to it later and read it at your leisure. Alternatively you can receive the information in this article as a short email course. Simply enter your email address and you will receive one lesson a day for the following nine days.
The lessons I share have been learned from a career in building investment portfolios for millionaires as well as being one of the most regularly quoted investment experts in the national press, including The Times and The Telegraph. These lessons are also learned from interviewing fund managers as well as the conclusions of academic research stretching back 100 years, which form the basis of our unique 80-20 Investor algorithm. 80-20 Investor is the innovative DIY investment service run by MoneytotheMasses.com which has empowered members to outperform the market, passive investment strategies and fund managers such as Neil Woodford. Using 80-20 Investor's research I invested £50,000 of my own money in March 2015 to show how 80-20 Investor empowers DIY investors. In the the 16 months since I started running my live portfolio I am up over 11% in a period which included a number of market crashes as well as a Brexit vote in the EU referendum. Over the same period the FTSE 100 lost more than 1.5%.
In this article I lift the lid on how I was able to help complete novice investors achieve the above investment returns. I reveal the inner workings behind what makes a successful investor and 80-20 Investor outperform as much as it has. I am happy for you to take what I will show you and use it yourself for free.
Should you invest in funds or shares?
I'm regularly asked by investors 'Should I invest in funds or shares?'. The short answer is that you should only invest in shares if you have the knowledge and expertise to analyse company accounts and make an appropriate investment decision. Buying the shares of one company is very high risk. By investing in funds, which are pooled investment vehicles, you can mitigate some of that investment risk. An investment fund pools together investors' money to benefit from economies of scale and for the money to be run by a fund manager in accordance with his or her investment remit. As such they will be investing money across the shares of hundreds of companies so mitigating investment risk. Funds (be they unit trusts, investment trusts or ETFs) are the most popular vehicle for armchair investors to invest their money or pensions. This excellent investing in funds guide covers everything you need to know about investing in funds including how to get started investing in funds, explaining what investment funds are and how they work.
For the remainder of this article I will assume that like most ordinary investors you will be looking to invest in funds. So I will show you how to identify the best funds to invest in. I will teach, you based on research and experience, how to increase your chances of investing in the best performing funds as well as how to build a portfolio. I will also show you how to know when to sell a fund. Below I provide a list of the topics this article will cover so that you can refer back to them. I hope you enjoy the article and please share it on social media.
DIY Investing lessons and topics covered in this article
- The one thing keeping investment professionals up at night
- The most important skill in fund management
- Why fund managers underperform & the 1st advantage you have over them
- What Andy Murray's career can teach you about successful investing
- The second advantage you have over professional fund managers
- The simple tool to help you beat the market
- The most important investment lesson you will ever learn (& the investing monkey)
- The investment process fund managers want to keep to themselves
- Which is best, Passive or active investing? - the definitive answer
- Why you should stop reading the money pages, how to build a portfolio (& how I broke Google)
1. The one thing keeping investment professionals up at night
During my career in the City I can’t tell you how many hours I spent listening to fund managers, the guys you trust to invest your money, tell me how their investment process will outperform that of their rivals and the market to ensure that they are one of the top investment funds. Of course I know they won’t do this, in fact they will come nowhere near doing so as research has shown only 1% of fund managers consistently beat the market over the long term. Does this mean that they are lying to me during these chats or are they just deluded?
The truth is that they will indeed outperform their rivals some of the time but will equally underperform at other stages in an economic cycle. Or in other words ‘every dog has its day.’
Often I would ask them the simple question ‘So from an investment perspective what keeps you awake at night?’ Interestingly they always had an answer, whether it was the UK slipping into recession or the collapse of the euro. It always struck me that if they were truly gifted at what they claim to do (making money for you) then they wouldn’t’ be lying awake at all!
The truth is that what keeps the person you pay to invest your money awake at night is the fear of losing his/her highly paid job. But you might think that that might not be a bad thing as it keeps the investment professionals (the fund managers) on their toes, right?
Wrong! In fact the opposite is true and in the next section I will explain why a fund manager’s fear of losing their job will end up losing you money.
So to sum up, the first DIY investing lesson is:
Fund managers care most about keeping their well-paid jobs, above anything else including you, which is why they don't deserve your loyalty.
Did you know?
80-20 Investor is a research backed service which tells you not only what to buy but what and when to sell. We are not paid via your investments, instead we are funded by the cost of a subscription, equivalent to the price of a cup of coffee a week. So our sole aim is to make you a successful investor whichever investment platform you use.
2 . The most important skill in fund management
A fund manager worries about losing his/her job above everything else which is detrimental to your wealth. Much like the world of Marvel comic books, investing has numerous heroes and villains. And so it was that fund manager Tony Dye, who died in 2008, acquired the nickname ‘Dr Doom’. Most DIY investors will be unaware of the scale of Dye’s crime. What could he have done which was so bad to be likened to one of the most infamous supervillains?
In fact his crime was simply to not follow the crowd during the stock market dotcom boom years of the 1990s. His outspoken pessimism, which earned him his nickname, eventually cost him his job as the market continued to soar. Having moved billions of pounds of clients’ money out of the stock market, by March 2000 it was estimated that they had missed out on £8.6 billion in potential market gains. The firm he worked for, Phillips & Drew, was called a “standing joke” by The Times and lost more clients than any other fund management firm in 1999. So it was that in 2000 the firm lost patience and parted company with Dye, their chief investment officer.
Months after this the stock market crashed and Phillips & Drew went from propping up the pension fund performance tables to sitting pretty at the top. Dye’s earlier pessimism was proved right while his peers, overweight in technology shares, saw their investments plummet in value. Yet ironically most of them held on to their jobs.
So the moral of this story (and DIY investing lesson number 2) is that in the investment management world it doesn’t matter if you are right or wrong, just don’t be different.
Or in other words, it’s ok if you are wrong if everyone else is as well. That’s how fund managers keep their jobs and why their portfolios soon begin to mirror one another’s, bar a bit of tinkering around the edges. But still, a tendency to herd wouldn’t be a bad thing if the herd were usually right?
The problem is that they are not usually right as the chart below shows. But the good news is that by learning why fund managers fail to beat the market DIY investors can ensure that they do. Which is what the next few lessons will cover. Although it may seem hard to believe, you (an armchair investor) have some distinct advantages over all fund managers.
Did you know?
80-20 Investor analyses 10,000s of funds (unit trust, investment trusts and ETFs) and tells you in seconds where the best opportunities lie, so you can spend more time enjoying your life.
3. Why fund managers underperform & the 1st advantage you have over them
Back in 1985 two economists (Daniel Kahneman and Amos Tversky) showed that investors were happier to take more risks to avoid losing money than they would to increase a profit. Perhaps even more interestingly this remained true even if the size of the potential loss or profit were identical. So why is this?
What this Nobel Prize winning piece of research identified was that emotion plays a key part in investing. As humans we are biologically and psychology destined to be bad at investing.
When it comes to a decision of whether to buy versus a decision to sell a share or fund the latter is much more difficult psychologically. That’s because when investors are faced with a share or investment sitting on a paper loss they are much more likely to hold on to the losing investment longer than they sensibly should in the hope that things will turn around. Fund managers are no different. Despite the increasing investment risk they don’t want to crystallise the loss by selling out because that will essentially be an admission of being wrong. Psychologically that is painful? But why can’t we admit to being wrong?
Robert B. Cialdini PH.D. explains this beautifully in his book ‘Influence – The Psychology of Persuasion”. To summarise, humans are social creatures whose success lies in their ability to live in groups. But the success of society is reliant on a number of key behavioural traits, which can be exploited by unscrupulous salesman. One of these is our compulsion to be consistent.
As humans when we ‘nail our colours to a mast’ we are compelled to stick with it. A social group won’t work if its members can’t be relied upon, and humans are social animals after all. Long ago this allowed us to grow, defend ourselves and develop. But still today there is enormous social pressure to be consistent. Ever found yourself arguing a point that you are no longer sure you totally believe in? That’s consistency at play.
So what has all this got to do with investing and fund managers? Well when a fund manager exclaims that his investment process will be successful he will find it psychologically difficult to change that process, even if it starts losing money, as they will have to admit they were wrong. The fact that the manager has hundreds of millions of pounds (or even billions) invested in their funds makes admitting they got it wrong even harder as that’s a lot of people to disappoint. Then add on top of that the restrictive investment mandate he/she has agreed to, which is written in black and white on the company’s literature, you can then see one of the key reasons why managers underperform.
But what about DIY investors themselves? Why don’t they sell out of poor performing funds? Some will of course, but most won’t for a long time until things get really bad. Admitting that you mistakenly bought into a fund manager’s story is pretty painful psychologically. It’s the very reason why financial advisers continue to invest their clients' money into dud funds.
The first advantage you have over fund managers is that you don’t have to appear consistent to anyone and fall into the trap of continuing to do things that will lose money. Or in other words lesson 3 is:
There’s only one thing that will lose you more money than being wrong, and that’s being consistently wrong.
Later in this article I will tell you a simple technique to avoid being consistently wrong. But successful investing is not just about limiting your losers, as the next section will show you. Anyone can be successful at investing, particularly if they have an interest in sport. That might seem strange but Andy Murray’s tennis career could teach you a thing or two about investing
Did you know?
80-20 Investor has been designed with safety measures (to help protect your money) to alert you when you are wrong or when markets turn against you. No other research service offers that.
4. What Andy Murray's career can teach you about successful investing
Economist and journalist John Authers wrote a fairly understated piece in the Financial Times back in June 2014. It was a wonderful piece drawing the comparison with tennis coaching and successful investing. But I want to take this one step further and use a real example.
Back in 2011, Andy Murray was fast becoming the ‘nearly man' of tennis. A fiercely talented young tennis player with a work ethic to match. Yet despite this Andy Murray had made it to 4 grand slam tennis finals and failed to win any of them. A change was needed.
In 2011 he appointed former tennis champion Ivan Lendl as his coach. Lendl was instantly credited with being a calming influence on the young Scot who was prone to on-court tantrums which adversely affected his performances. In addition, Lendl worked on Murray’s back-hand and court positioning.
The results were almost instantaneous. Within two years Andy Murray not only went on to win the US Open and Olympic Gold Medal but he also became the first British man to win the Wimbledon title in 77 years. What Lendl did was eliminate the things detracting from Andy Murray’s game and improve his performance as a result.
But can the same thought process be applied to investing. Well Cabot Research, based in Boston, tested the theory with fund managers.
They found that investment skill can be broken into three categories
- Setting the size of each holding you buy
After analysing over 500 fund managers one of the main problems they identified was that even when a manager picked a winner 1 in 6 managers failed to add or bolster their position at a favourable price because they were too busy beating themselves up about not buying more earlier. Emotion, in this case regret, hampered their performance. However the biggest problem identified by the research was that 1 in 4 of the managers repeatedly held on to their winners for too long,
So lesson number 4 is
Knowing when you are no longer right is as important as knowing when you are wrong. Or put it another way……selling winners is just as important as selling losers.
Later in this article I will show you a simple way to ensure you know when to sell your winners. Just remember, as American financier and investor Bernard Baruch once famously said “Nobody ever lost money taking a profit.”
Did you know?
80-20 Investor can help you decide when to take profits.
5. The second advantage that DIY investors have over professional fund managers
I’ve already told you about one advantage you have over fund managers, but what about the other? It might seem incredible to believe that you have any advantages over a fund manager, who after all has the latest software and hardware at their disposal. A person who has an army of analysts scrutinising every share or bond in existence. A person with access to economists and to the top tier of management of the very firms he or she invests in.
But, what you must remember is that:
- Fund managers are paid to invest money.
- Their employers expect them to invest money
- The people who buy their funds expect them to invest their money.
And therein lies the second problem for a fund manager, they are compelled to invest, even when it might not be a good time to do so.
Their employers expect them to invest, and so do the investing public as strange as that may sound. That’s because no one is going to be happy with a fund manager who sits in cash rather than invest and who then charges them an annual management fee for the privilege! It’s a sure way for investors to lose money, for fund houses to upset a lot of people and the manager to get the sack. And as I’ve already told you, that’s what the manager cares about most of all, losing their highly paid job.
But cash should not just be seen as the starting point for most investors; it is also a viable destination asset in itself. Every asset has its day, even cash, as the chart below testifies (click the image to enlarge it). The period in time when cash outperforms other assets is exactly the time when most of these other assets are losing investors a lot of money!
If you look at the years 2000-2002 (when the dotcom bubble popped) you can see that cash produced some of the strongest returns (i.e. they are towards the top of those yearly columns). Even if a fund manager held a diversified portfolio (the white squares) he would still have lost money. Or in other words his compulsion to do something with your money would have lost you money!!
So the fifth lesson is that:
Your biggest advantage over a fund manager is that you can choose when to and when not to invest.
Most fund managers will only hold around 5% of their assets in cash to provide the liquidity necessary for the day to day running of their funds. If they are worried about markets this cash position may, on average be nearer 10%. But that means they are nearly 90% still invested! So the key is to know when to sell out and hold cash and when to not, as that is what separates a successful investor from their peers.
I will shortly tell you the proven way to successfully know what and where to invest. But first I will show you a simple idea you can use that not only pulls together everything that this article has taught you so far, but actually does it for you. It’s a tool that I deliberately built into 80-20 Investor.
Did you know?
That I run my own £50,000 investment portfolio live on 80-20 Investor so that subscribers can see how and what I invest in.
Using the 80-20 Investor research I invested £50,000 of my own money in March 2015 to show how 80-20 Investor empowers DIY investors. In the the 16 months since I started running my live portfolio I am up over 11% in a period which included a number of market crashes as well as a Brexit vote in the EU referendum. Over the same period the FTSE 100 lost more than 1.5%.
6. The simple tool to help you beat the market
Firstly a quick recap of what we’ve learned so far :
- Professional investors will do anything to keep their jobs, even if that means losing you money because….
- They are not rewarded for being right, they are rewarded for not being different from the herd, even if the herd is about to step off a cliff (so they don't deserve your loyalty)
- Successful investors are able to quickly acknowledge when they are wrong and change course
- Selling your winners is as important as selling your losers, despite what your emotions are telling you.
- And deciding not to invest (hold more cash) is one of your greatest advantages, especially during a market crash.
Yet there is a simple but powerful idea that exists that is not widely available and therefore not used by armchair investors. That is the trailing stop-loss. There are a number of variants but a simple stop-loss is an order to sell a holding when it’s price hits a pre-agreed figure. So lets say the price of a share is £1. You might set a stop-loss trigger so that when the prices falls by 5% (i.e. to 95p) you will get an alert to sell.
That’s great, but what happens if the share prices doubles to £2. You’ve made a lot of profit but your stop loss is still set at 95p. So if the price plummets back down your stop loss won’t trigger until you hit 95p. A fall from £2 to 95p is a 52.5% fall, and a whole lot of missed profit! The problem was you didn’t sell your winner!
That’s where a trailing stop loss comes in. In the above example a trailing stop loss would have increased along with the price of the share so that when the price was £2 your stop loss trigger would now be £1.90. So if the market turned and crashed your trigger would have encouraged you to sell at £1.90, i.e 5% below the max price achieved. By selling your winner you made a huge profit and would have sat in cash while the rest of the market tumbled.
But a trailing stop loss doesn’t just sell your winners, it also sells your losers. Imagine if instead of the share price going up to £2 it had fallen straightaway from £1 to 80p, your stop loss would have been triggered at 95p and minimised your loss.
The simple idea of a trailing stop loss ensures that you:
- Know when you’ve made a mistake and can change course
- Sell your winners and take a profit
- Take the emotion out of investing
- Hold cash when the time is right
Of course, it does mean obsessing over the prices of funds every day and the information is not very accessible, but 80-20 Investor does all this for you and will even email you when the trailing stop loss has been triggered. Think of it like a smoke alarm for DIY investors. Watch this short video to see how it works. It’s just one of the things that subscribers get for just £3 a week.
Watch this short video
Watch this short video to see how the 80-20 Investor trailing stop loss works. It’s just one of the things that subscribers get for just £3 a week.
7. The most important investment lesson you will ever learn (& the investing monkey)
But now we’ve come to an exciting part of this article. I’m going to teach you how to know where to invest your money. It’s so easy that even a monkey can do it……..and has!
Most investors focus on what funds to invest in and don’t worry about limiting the downside. That’s why up until now I’ve deliberately talked about knowing when to sell first. But now I’ll explain how successful investors know when and what to buy, and somewhat bizarrely monkeys can show us the answer.
Back in 1973 Burton Malkiel (a professor at Princeton University) claimed in his book “A random walk down Wall Street” that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”
His claims have since been tested, most recently by a firm called Research Affiliates. Their firm randomly selected 100 portfolios containing 30 shares from a universe of 1,000 shares. They then repeated this processes every year, from 1964 to 2010, and tracked the results. The process effectively replicated 100 monkeys throwing darts at the share pages each year. Amazingly, on average, 98 of the 100 ‘monkey portfolios’ beat the 1,000 stock capitalization weighted index each year!
So basically a monkey can beat the market, a feat which most fund managers can’t do! But if you think that I don’t like fund managers and prefer index tracking funds – you couldn’t be more wrong as I explain later in the section ‘Active vs Passive Investing – which is best. The truth is I don’t distinguish between either methodology.
So how were the monkeys able to outperform the market?
The annual Credit Suisse/London Business School global returns sourcebook is the oracle when it comes to answering this question. The document contains data and analysis of investment returns spanning 114 years and 25 countries.
The paper concludes that three investment styles have consistently outperformed since 1900. That’s using over 100 years of data!
What I’m about to tell you is the most important investment lesson you will ever learn and one that a lot of professional investors don’t want you to know. The 3 investment strategies proven beyond doubt to consistently outperform are:
- Momentum investing– whereby you buy the best preforming shares from recent history
- Smaller company investing – as the name suggests you invest in smaller companies, which tends to outperform investing in large companies
- Value investing – where you tend to end up buying defensive shares with strong dividend growth
So when the monkeys were randomly picking shares they inadvertently were taking advantage of one or all of the above strategies because they weren’t constrained by conventional investment thinking, (i.e. that they knew better) or emotion.
So which investment strategy is it best to choose. The good news is that you can have all three. There is a simple way to harness the power of all 3 investment strategies. It’s so simple it’s why hedge funds and institutional investors use it yet don’t tell you for fear that you might just do it yourself without them.
8. The investment process fund managers want to keep to themselves
Momentum investing vs Value investing vs Small cap investing – which is best?
So let’s start with value investing. One of the most famous value investors is Warren Buffet. Warren Buffet is widely regarded as the most successful investor of all time and one of the wealthiest people in the world, worth an estimated $64billion! As a value investor Buffet buys shares in companies that he believes are undervalued (that's why it's called value investing) by the market on the assumption that when reality catches up with the company fundamentals the share price will be revalued and he will make a profit. Which of course he has a very good track record of doing.
Buffet finds perceived value in companies by scrutinizing their balance sheets and accounts. He’s looking for the value that others can’t see, the earnings potential that his peers are overlooking. The fact is it’s almost impossible to replicate what Buffet has done. That’s because determining ‘value’ is subjective and can be hit and miss. The investment landscape is littered with investors who misread the ‘value’ signs and got it wrong. Sometimes things are cheap for a reason and get cheaper as a result. Even value investing gurus like Buffet get it wrong, as he admitted in 2014 after his disastrous investment into Tesco shares.
So what about smaller company investing? Back in 1981 a chap called Rolf Banz wrote a research paper that showed that the shares of smaller companies outperformed those of larger companies. And so it was that small cap investing, as it's called, became entrenched. The common explanation as to why it works is that small companies become big ones, but also that smaller companies are less researched and so pricing anomalies (or value) exist. But research by another chap called Jonathan Berk in 1997 concluded that in fact smaller company investing is nothing more than a poor way of value investing. Essentially the value lies in a pricing anomaly whereas true ‘value investing’ references the value to company fundamentals and accounts. So in a sense, it only works because it’s a poor form of value investing.
So if smaller company investing is a poor relative of value investing, which in itself is not practical for armchair investors as they don’t have the time or expertise to make an assessment, where does that leave us?
The answer is momentum investing! Momentum investing is the act of riding unfolding trends which are working in the current investment environment. There have been countless academic research papers proving that momentum investing models work. The most influential momentum investing research paper was produced by Jegadeesh & Titman in1993.
Since then evidence of the power of momentum investing has grown and is irrefutable. But rather than focus on academic arguments I want to show you the power of momentum investing by using a real life example.
So let’s say you had invested just £10,000 in UK equity funds back in 1995. How much would it have grown to today if you'd invested in each of the following ways:
- you'd simply invested in the FTSE 100
- you'd invested in a typical UK equity fund
- you'd invested by picking UK investment funds using simple momentum (switching funds every 3 months)
To answer this I tracked and analysed the returns of the UK stock market and hundreds of UK equity funds over a 19 year period. The result is shown in the chart below, with the final fund values in each case represented by a bar:
So in each case your £10,000 would have grown to
- Average UK equity fund – £33,428
- FTSE 100 – £35,235
- Using momentum to pick UK equity funds – £114,057
Or put it another way, if you'd simply invested your money with a single UK fund it would on average have underperformed the FTSE 100. But if you had used simple momentum to choose funds (and switching only 4 times a year) your £10,000 would now be worth more than £100,000!
No wonder fund managers would rather you didn't know about momentum investing.
Imagine if you'd had a pension pot of £100,000 and had used the simple momentum strategy. Your fund would now be worth over £1 million!
Did you know?
80-20 Investor allows you to harness the power of momentum investing, in minutes, by analysing tens of thousands of funds (including unit trusts, investment trusts and exchange traded funds) and identifying the best funds to invest in.
By the way, if you are new to investing and you want to know how to buy investment funds, so you can apply the lessons you are learning, then this FREE guide tells you all you need to know to get started. It's simple, quick and easy.
Does momentum investing work for regular savers?
It's irrefutable that momentum investing is an incredibly powerful and successful way of investing. However it even works if you can only invest small amounts each month, say £100.
If you look at the chart below, it shows how much you would have made if you’d simply invested £100 a month since 1995 (a total of £22,800). Incredibly your pot of money would have grown to £94,328 today. Compare that with £42,235 from investing in the average UK equity fund or £41,003 from investing in a FTSE 100 tracker. By using momentum investing you would have made £50,000 more! Imagine what you could do with that. Your children could attend university debt free, or you could have several round the world trips or new cars!
But why does momentum investing work so well?
We’ve established that there are 3 styles of investing which research has shown outperform over the long term
- Value investing
- Smaller companies investing
- Momentum investing
Yet not only does momentum investing work in its own right but it encapsulates the other two styles. Think about it, if investing in smaller companies suddenly becomes increasingly profitable then it will become apparent to a momentum investor, who buys what is already rising. As the new trend becomes established (i.e. gains momentum) then momentum investors will inevitably buy it.
The same can be said if a fund or share suddenly outperforms. A value investor may have identified it previously, yet has been waiting for the market to catch on. When it finally does the share price will go up, climbing up the share performance tables. At this point momentum investors will buy it and ride the wave upwards.
Of course value investors will have ridden the wave from the beginning, but they will have also missed out on other opportunities momentum investors had been enjoying in the meantime. Also I don’t know about you, but I’d rather buy something on the basis that it’s working, not on the hope it might.
The beauty of momentum investing has over the other investing styles is that it is easy to apply.
So why don’t the finance professionals use momentum investing? Or do they?
Well they actually do, they just don’t shout about it. Imagine if you ran a fund and charged people a lot of money to access your wonderful investment expertise. They’d be pretty miffed if it turned out that they could just have done it themselves and achieved the same return. That is why they come up with fancy investment processes or reasons why they are different.
Of course fund managers use lots of other investment styles as well. It’s important to leave your ego at the door when it comes to investing and realise that other investment styles will outperform at given times. It’s that ‘every dog has it’s day’ idea again.
But momentum investing has been shown to consistently outperform. A lot of people struggle with the concept that the answer to a question can be so simple. They think how can I outperform all those fund managers in the City of London with all their analysts. The answer is simple:
Because with momentum investing you have every fund manager’s best ideas and analysts working for you. Which is another advantage you have over every fund manager, as they are stuck with just their own team of analysts.
Momentum investing helps you ride the waves of those analysts and managers who are getting it right, as it will direct you to buy their fund. Then when another manager or team of analysts have a better idea you jump on that and look to profit.
That is why momentum investing lies at the heart of 80-20 Investor's unique algorithm that analyses thousands of funds every week.
You may wonder why have DIY investors not previously tried to harness the power of momentum. Firstly, they probably didn't know about it. Secondly, even if they did they couldn't do it easily and without being charged by fund platforms for switching funds. Yet competition between platforms has meant many no longer levy switching charges, so removing the biggest hurdle for DIY investors.
9. Which is best, passive or active investing? – the definitive answer
With momentum investing you invest in whatever is working, whether it is a passive index tracker or an active fund (one run by a fund manager). That’s why I don’t enter into the passive vs active debate and neither should you. 80-20 Investor sees beyond labels and identifies those funds that are working. So which is best, passive or active investing? The answer is that it doesn't matter because you will invest in both at various times if you use a momentum based investment strategy. If the market favours a passive approach then the best momentum strategy will move you into passives and conversely if active investment funds are outperforming then you should be moved into those areas.
So now I’ve taught you how to know when/what to buy and sell. But up until now I've focussed on comparing funds of the same type (such as UK equities). So in the next section I will teach you:
- How you can apply what you've learned to build an entire portfolio and quickly know which types of assets to buy (i.e US equity funds or UK equity funds). Or in other words asset allocation.
Plus I explain why you shouldn't read the investment news or watch Bloomberg. However before you read the next section first answer the following question honestly and write down your answer. Don't worry if you don't know anything about football just go with your instinct. Who is likely to win the following Premier League fixture?
- Manchester Utd vs Tottenham Hotspur
Did you know?
80-20 Investor takes the momentum investing strategy pulls it apart and creates an algorithm to enhance it, and reduce the potential downside risks.
10. Why you should stop reading the money pages, how to build a portfolio (& how I broke Google)
The reason why I have written this article and given my research away for FREE is that I believe in challenging the status quo that exists in the financial services industry. I believe passionately about putting the power back into the hands of the public. How I do that is through my site MoneytotheMasses.com, this article and 80-20 Investor.
In this section I am going to show you:
- Why you shouldn't read the investment news or watch Bloomberg,
- How to build a portfolio
- And how I broke Google!
Should you read the investment press?
Let me tell you a true story.
Daniel Finkelstein is a fascinating character. For those of you who don’t know he is a political commentator, a member of The House of Lords as well as the Executive Editor of The Times. But for a lot of sports fans he is better known as the man behind the Fink Tank, an online football results predicting tool.
It uses mathematical modelling of shots and goal data to calculate the probability of a team winning a given match. But a few years ago I attended a black tie dinner hosted by one of the biggest fund management firms in the UK. The highlight of an otherwise tedious evening was that Daniel Finkelstein was invited to give a talk. It was a fascinating speech largely wasted on all the fund managers present.
He discussed the phenomenon whereby knowing more about a given subject can be detrimental to your ability to make sound judgements. In fact it can actually lead you to the wrong conclusions.
Take the footballing example, a favourite of his, of who will win if Manchester United play at home versus Tottenham Hotspur? Ask a football fan and they will probably discuss the topic for about five minutes talking about injuries and formations. They will talk about managers, tactics and players before eventually either sitting on the fence or forming an opinion.
However, ask someone who knows nothing about football and they will probably pick Manchester United because they won the league most recently and they are playing at home. In fact, statistics show that the second person in all likelihood will be right. That’s because regardless of who is playing 50% of the time the home team will win a premier league match, 25% of the time the away team will win and 25% of the time it will be a draw. And if the home team is ‘the better team’ it only nudges up the odds of winning slightly.
The person who apparently knows nothing about football simply identified the key fact that Manchester United are playing at home. The ‘football fan’ let his judgment be influenced by the deluge of news he read about football. Investors do exactly the same.
Rolf Dobelli, author of The Art of Thinking Clearly, recently explained in a newspaper interview that: “News items are bubbles popping on the surface of a deeper world. Will accumulating facts help you understand the world? Sadly, no. The relationship is inverted. The important stories are non-stories: slow, powerful movements that develop below journalists' radar but have a transforming effect. The more ‘news factoids' you digest, the less of the big picture you will understand.”
The 80-20 Investor process taps into these powerful movements ignoring the noise that professional investors get bogged down with, which have been shown not to improve their ability to make more money.
As Daniel Finkelstein pointed out himself, this phenomena occurs in politics and investing. How ironic that he was telling this to a room full of fund managers who immerse themselves in the news (noise) of the investment world.
Smart investors don’t spend their life reading everything, they just take note of key underlying trends.
How I broke Google
80-20 Investor was designed deliberately to harness all the lessons I’ve talked about in this article so that you can make money investing yet only spending minutes doing it.
Have a listen to this short podcast where I talk about how I developed 80-20 Investor and how I broke Google. When building the algorithm behind 80-20 Investor I used the processing power behind Google's equivalent of Excel. I discovered Google can't cope with doing 2 million calculations at once! Also at the bottom of this article there is a chart that shows you how 80-20 Investor's algorithm has performed in real life since launch.
Solving the asset allocation problem
Investors generally struggle with knowing what assets to invest in. For example you may want to invest in funds that are generally low risk funds but don't know whether to buy bond funds or property funds. Similarly you might want to gain exposure to equities but don't know whether to buy UK equity funds, or US, European or Japanese equity funds for example.
Now imagine splitting your portfolio into 3 parts, the low risk portion (covering bonds and property etc), medium risk (such as developed world equities and managed funds) and high risk (such as Chinese equities or emerging markets). Now imagine if you analysed every fund out there (ignoring the sector it belongs to) and looked out how it behaved. Then you assigned every fund into one of the three risk boxes. What you end up with is every fund categorised by its true risk level rather than its label. Don't forget property funds include those that invest in actual buildings as well as those that just invest in shares of property companies. They are very different animals and should be separate in my opinion.
Now imagine applying momentum to each of the risk categories so allocating your portfolio to those funds with momentum. So if UK shares do badly then your portfolio won't be exposed to them, instead favouring another asset within the medium risk arena. This is tactical asset allocation based upon momentum.
This is exactly what 80-20 Investor does with its 80-20 Portfolio (its best of the best selection) and it is the only service that does this. I know you will be thinking so how does it perform? The chart below this article shows how the portfolio has done since we started tracking it in August 2014 versus the FTSE 100 and the equivalent average managed fund.
Pulling all the lessons together
Finally I want to pull together a checklist of do's and don'ts drawing from our lessons in this article:
- Successful investors leave their ego and emotions at the door
- Fund managers don't deserve your loyalty
- Their fear over their job security will cost you money as they tend to follow the herd
- It's not about passive (trackers) versus active investing – simply invest in whichever is working
- Correct your mistakes by selling your losers
- Yet take your profits and sell your winners
- A trailing stop loss will help you
- You have a number of advantages over fund managers namely your ability to quickly correct mistakes and sit in cash
- Momentum investing is a proven investment strategy which only now DIY investors can harness
- Do not buy and hold funds for the long term, by reviewing and switching you harness the best results from across the fund management industry. Fund managers can't do this. They tried and failed when they launched ‘fund of funds' as they had to still buy their company's own funds
- Use tactical asset allocation to ensure you are invested in the right assets at the right time
Coffee or Caviar?
80-20 Investor subscribers have all of the above tools and lessons applied for them for just £3 a week. On top of that they can also submit requests for bespoke research carried out by myself. Want to know which funds to buy in a market sell-off? Why not ask me? I also invest £50,000 of my own money live on the site so 80-20 members can see what is in my personal portfolio. As I mentioned earlier since launch I am up 11.1% outperforming legendary fund managers such as Neil Woodford, the best passive investment funds and the wider market as shown below.
I realise that some people might only want to apply momentum investing to some of their portfolio. That's why I provide in depth research which is sought after and published by the likes of The Times and The Telegraph.
To have access to the analysed fund data, portfolio, research reports, stop loss alerts and essentially your own research department (me) would cost near £100,000 a year. You are getting it for the price of a cup of coffee a week. Plus you are free to simply buy the funds via any fund platform or pension you wish. To access the professional data streams which I analyse costs thousands a year alone.
So why not start your 30 day free trial of 80-20 Investor. Remember, if you choose to pay annually you also get an additional 30 day money back guarantee.