Everyone’s likes making a quick buck in the markets, and sure, they come by from time to time, but you also lose a fair bit of the time. It’s all about timing, and I know for a fact that I won’t beat the bankers or high frequency traders at that. So I take a different approach and have a different investing style.
What if we took the wins, took the losses and averaged it out over the long run?
This is called dollar cost averaging, and it assumes you’ll add a sum of money each month to your investments. It doesn’t matter if the price is high or the price is low, you’re not aiming to time the market perfectly (though it’s always nice when you do!!). You want the long, gradual, unexciting growth which protects you from market fluctuations.
Why? Because it’s unlikely you’ll beat the market if you actively invest.
Warren Buffett made a bet in 2008 that a passive investment in the S&P 500 over ten years would beat an active hedge fund. That turned out to be true, with Buffett earning on average 7.1% versus 2.2% with the hedge fund.
“If you have an active manager who beats the index one year, the chance is less than a coin flip that the manager will beat the index again next year”Ryan Poirier, senior analyst at S&P Dow Jones Indices
So with this in mind, you can probably guess where I’m going here, but for those who are new, my trading style is to predominantly invest in ETFs and Index Funds for the long term. I’ve mentioned it before in the investing newsletter, each month I’ll top up my selected ETFs and try keep them as balanced as possible. Funds which are most underweight get topped up first, and those which are overweight I tend to leave alone.
The FIRE investing style would have you invest in something like MSCI World netting you an average return of about 7%. And that’s good! Put away £500k and each year you get a cool £35k pay out (before tax) for doing absolutely jack squat.
The problem with this is that you’re over exposed geographically. When you look at the top holdings by country, 65% of it is held in America. Would you trust “A very stable genius” to not mess things up with over half of your portfolio? I sure as hell wouldn’t.
So we aim to reduce risk and diversify our assets.
How? By selecting ETFs or funds which track countries, and by balancing it out that way. A little more work yes, but in the end you have a better balanced portfolio which tracks MSCI World pretty closely
There’s always a downside isn’t there 🤷♂️. In this case, especially during the crash in 2020, we’re less exposed to the US Tech sector. Think Netflix, Zoom, Amazon. They all did particularily well during lockdown, and it would be great to have a little exposure there.
To combat this, I use Freetrade to invest in certain sectors I would like limited exposure to. Once again, mostly through ETFs.
As this post is already quite long, I’ll leave it here and write up how I go about investing in Freetrade, which I approach with a different trading style for more speculative and risky plays.