Four strategies for hands-off investors
Short-term market noise can unsettle investors and tempt them to make changes to their portfolio when really doing nothing is often the best course of action.
Below, Rob Morgan of online platform Charles Stanley Direct, outlines four strategies for investors who want to shut out the noise and be “hands off” but successful.
- Allow compound interest to multiply your returns
If you allow it time, compound interest (earning interest on interest on interest), can be powerful. The principle is simple: buy assets that produce an income and keep reinvesting that income in more income-producing assets. Over the years it can mean your wealth grows substantially, especially if the income stream itself grows.
This approach can work for any income-producing asset, but our favourite is “equity income” – dividend producing shares. Over time companies can grow their profits and increase pay outs to investors. Continually harvesting and reinvesting this income can lead to strong long term returns if you select the right stocks. Rather than pick them yourself, buying an equity income fund with “accumulation” units can do this for you.
- Buy “inevitables”
Invest in good quality businesses and time is on your side. Invest in a poor quality one and it isn’t. Certain businesses have what renowned investor Warren Buffett describes as an “economic moat” around them. For instance, offering a unique proposition, dominating market share through a superior product or unparalleled channels of distribution. In these circumstances it is hard for newcomers to penetrate the market, so the strong are likely to get stronger.
These are often large, mature businesses that can seem boring, but they can also make great “buy and lock away” investments. Choose carefully though as businesses often need to innovate to avoid being usurped by a “disruptive” company with new technology. If you would prefer not select shares yourself, or would like to diversify, funds that follow this philosophy include CF Lindsell Train UK Equity and Fundsmith Equity.
- Let the manager take the strain
Most fund managers remain “fully invested” in their respective areas of interest, say UK equities or corporate bonds – and building a diverse portfolio of such investments can provide excellent returns over the long term. However, there are a growing number of multi-manager or multi-asset funds that take a more active approach, meaning you can also leave market timing decisions to fund managers as well – though there is no guarantee they will get them right.
- Invest regularly
One way to counter market ups and downs and take some of the stress out of investing is to contribute money at regular intervals, say once a month, rather than a lump sum in one go. No one can precisely call the market tops and bottoms, so the advantage of dripping money into the market is that you don’t need to worry that you are putting all your money in at the peak. In fact the strategy can often turn market volatility to your advantage and is a sensible way of investing in more risky areas.