In the second part of this two part blog series, we are going to look at the final two questions DIY investors need to ask themselves each and every day. Here are the final two of the four:
Question 3. If I should be invested, what should I be invested in?
This comes down to your objectives and risk profile. We are adventurous investors with an extremely long-term outlook and so our focus is always on investing in the highest quality growth funds and holding them over the long haul. To find the best funds and time our buying, we use Morningstar. To find out how we find the best funds, click here.
When looking for a quality fund managed by an exceptional manager, the first point we hone in on, which we believe is the most important thing when selecting a fund, is the fund’s past performance. With performance, if we are currently in a bull market like we are right now (see our latest Big Picture for more information), we start off by looking at how the fund has performed since the bull market began. We compare how the fund has acted versus the Nasdaq Composite, which is arguably one of the strongest indexes in the world.
You don’t need us to tell you that there is no guarantee that a fund will continue to perform well just because it has performed well in the past. However, our take is that fund managers are like football managers. What is the probability that a football manager with good track record, such as Sir Alex Ferguson, will perform well next season? Most would agree, including many bookmakers, that Sir Alex will ‘probably’ do well. This probability is based on Ferguson’s past performance.
We work on probabilities rather than certainties
This is the same way we like to view fund managers. We work on probabilities rather than certainties and if the manager of a fund has outperformed the Nasdaq Composite, in our book it proves that they are a quality manager and ‘likely’ to do well in the future. The trouble is, managers of funds move around and that’s why you have to get the direct connection between the fund’s performance and the manager who is currently managing the fund.
You have to discover who the present fund manager is and when they started managing the fund. This is so you can link the performance with the present fund manager. It’s no good if you see impressive performance over the last few years and you discover the present manager has only just started managing the fund.
Looking at short-term past performance is also very important. This short-term period could be the previous week, month, two months or the previous quarter. This is just as important as looking at the fund manager’s longer term performance. We're looking for managers that are right in the middle of the money flow. For example, if over the last three months the Nasdaq had made a 10% gain, we want to see that the fund has outperformed the Nasdaq and made a greater gain than 10%, clearly demonstrating that the fund manager is ‘in the money flow’ right now.
Question 4. If I am invested, should I be staying in those investments or should I be making an adjustment?
This comes down to good management, accurate daily market, stock and fund analysis and accurately timing your buying and exiting of your investments. You will need to compare how your investments are doing by using a performance indicator such as a benchmark. Ask the question, are my investments outperforming (doing better than) or underperforming (doing worse than) my benchmark?
The benchmarks we use are the US technology index, the Nasdaq Composite and the FTSE 100. When we see our investments underperfom over an extended period, we know the big money has moved out of the sectors and stocks our fund is invested in and that means it’s time to cut loose and find a better candidate. It’s always best to be invested directly in the money flow. To find out how we do that, click here to find out how we find the best funds.
The 4 questions DIY investors need to ask each and every day are:
- Should I be invested right now?
- If yes, should I be fully invested or partially invested?
- If I should be invested, what should I be invested in?
- If I am invested, should I be staying in those investments or should I be making an adjustment?
Ask yourself, do you feel confident in answering these questions?
Remember that you will need to ask and answer these questions each and every day throughout the year. Ask yourself, are you thoroughly analysing the market and your investments?
Are you making the common mistake of DIY investors and going off how you feel? These days, many DIY investors choose their own investments, but soon after choosing them they have no idea whether to remain fully invested, make a change and become partially invested or not to be invested at all.
If they are invested, they become confused about if they should still hold the investments or whether they should be making a switch. Most of them unfortunately get caught up with the emotions of the stock market. When emotions are running high and there is a general feeling of euphoria, they unfortunately buy at the top of the market. When markets are at their lows and there is a general feeling of despair and depression, they sell. To see evidence of this, look at our free report Bad Time to Invest?
We hope this information has proved useful. Good luck with your investing!
As always, if you have any questions or thoughts on the points I've covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.
ISACO is a specialist in ISA and SIPP Investment and the pioneer of ‘Shadow Investment’, a simple way to grow your ISA and SIPP. Together with our clients, we have £57 million actively invested in ISAs and pensions***.
Our personal investment service allows you to look over our shoulder and buy into exactly the same funds as we are buying. These are investment funds that we personally own and so you can be assured that they are good quality. We are proud to say that by ‘shadowing’ us, our clients have made an annual return of 17% per year over the last three years** versus the FTSE 100’s 7.9%.
We currently have close to 400 carefully selected clients. Most of them have over £100,000 actively invested and the majority are DIY investors such as business owners, self-employed professionals and corporate executives. We also have clients from the financial services sector such as IFAs, wealth managers and fund managers. ISACO Ltd is authorised and regulated by the Financial Services Authority (FSA). Our firm reference number is 525147.
*Cumulative return 31st December 1997 - 31st December 2010. Stephen Sutherland 93.3%, Nasdaq Composite 68.9%, FTSE 100 14.6%.
**31st December 2008 - 31st December 2011.
***15th November 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients.
ISACO investment performance verified by Independent Executives Ltd.