Making money out of the stock market requires far less effort than you would believe.
One of the most important things I've learnt about the stock market is that 99% of everything written about it is pretty much useless.
It's worth bearing this in mind when you're faced with a crisis of confidence about your investments. Many of us have probably been in this position after the falls we've seen this month. Switching off and stepping back is a good tactic I find. It helps you ignore any current turmoil and take a broader, long-term view.
I also believe times like these are terrible for making major decisions about your investments. You feel like you ought to do something but any decision you do make is likely to be rushed. You'll also pay too much attention to the crowd, or worse still, some idiot writing for a website. All this prevents you making a cool, logical decision based on fundamentals.
Stick to your plan
As an ex-colleague of mine was fond of saying - never change horses mid-stream. So if you have an investment plan that has served you well, don't throw it out at the first sign of trouble. A solid investment strategy is highly unlikely to become a poor one overnight and it should be able to cope with the events such as the ones we're currently experiencing.
For example, my own strategy is fairly simple and based on the fact that over the long term shares have produced returns well in excess of inflation. Also, like many homeowners, I already have a hefty amount invested in property so shares provide useful diversification for this.
As I'm in my late 30s, I can afford to take a very long-term view on my investments. They're earmarked as retirement funds so my basic plan is never to reduce my capital and to add small amounts on a regular basis, using my ISA allowance as a first port of call. I have a mixture of index trackers and investment trusts as the core of my portfolio. Then about a third of my funds are invested in a small selection of shares. Er, that's pretty much it. Well, I did say it was fairly simple.
The joy of investment trusts
Index trackers get more than their fair share of airtime on this website so I thought I'd highlight investment trusts instead. I use them as the core of my portfolio as they tend to be cheaper than other funds and offer better performance as a result. There are also far less of them, making picking one a lot simpler! For instance, the excellent Trustnet website lists 278 investment trusts but 2,278 unit trusts/OEICs and 6,123 pension funds!
Sadly, Trustnet doesn't have five-year performance figures for unit trusts but comparing the relative performance of investment trusts and pension funds is certainly an eye opener. Investments trusts have far more staying power as demonstrated by the fact that 75% of the 278 listed have a five-year record. Only 46% of the pension funds listed have a five-year history though.
Of the funds that do have a five-year history, 71% of investment trusts have produced a return of 100% or more over this time. Not only is that a nice round number, it's also the sort of return you should have got from a cheap UK index tracker over the last five years. However, just 24% of pension funds have managed the same feat (and I would imagine the figures for unit trusts are not much better than this). So not only are you faced with a smaller choice with investment trusts, the odds of picking a good fund are higher too.
Indeed, some of my best returns have come from investment trusts. I've had a holding in RIT Capital Partners
(LSE: RCP)
since 1996, during which time its share price has more than quadrupled.
On the flip side, selling out of other investment trusts rank among my worst investing decisions. Back in 1997 I sold Fleming Indian at 55p. For quite a few years this looked like a sensible move but earlier this month this fund, now known as JPMorgan Indian
(LSE: JII)
, nudged £5. I also sold a couple of Asian investment trusts a decade ago, which would have trebled my money had I stayed put. Although I re-invested the proceeds in each case, the investments I switched into haven't done nearly as well.
So here is the key to investing success. It's all about picking solid long-term investments and then ...... sitting on your hands. Over the last ten years, we've had numerous financial crises such as Long Term Capital Management, 9/11, the bursting of the dot com bubble and the current credit crunch. During all this time, the best investment decision was to do absolutely nothing at all.
More: Shares Still Beat Bonds
