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How To Easily Build, Manage and Run

a Successful Stocks & Shares ISA

The investment strategy - Keeping it simple
Successful long term investing in my view is more about compounding satisfactory returns over many years rather than attempting to time the market, ie trying to buy and sell shares or other investments at the optimum time and price.

This is because for most investors there is an incredible risk of attempting to buy low and sell high - the probabilities suggest that they'll get it wrong.

Don't forget that getting it wrong in the markets can come in 2 different forms, both of which can play havoc with the mental side to trading and investment -

  1. Lose capital - as investments you thought were heading higher in fact went lower
  2. Lose potential profits - If you're sitting in cash when the markets march strongly higher, that's cash left on the table (plus, when do you bite the bullet and get in, or will you get scared you're going to miss further gains and maybe buy at the top?)
Keeping it Simple - The Basic Investment Plan
My view is that for long term ISA investors the best way to operate is to -
  1. Track the markets - don't try to get smart by attempting to outperform the overall market which opens yourself up to the real risk of underperformance
  2. Slash all fees and charges to the bone - including annual management charges, and invest the savings back into your fund, and
  3. Let the power of compounding work over time
Successful long term investing doesn't need to be any more complicated than this.
The 4 principles of the ISA investment strategy
At its heart the investment strategy is extremely simple and consists of these main 4 principles -
  1. Use the ETFs as your investment vehicles
  2. Be at least half or fully invested in the markets at ALL times
  3. Construct a sensibly weighted portfolio of different financial asset classes
  4. Reinvest all dividends/income
Principle 1: Use ETFs as your main investment vehicle

Now that you know the value of using ETFs (matching a market's performance + very low annual charges) there is no need to buy traditional shares, and it is important to avoid all Investment Trusts, Unit Trusts and OEICs. The costs involved with these financial products are far too high which can lead to significant underperformance over time.

Principle 2: Be fully invested (or at least half invested) in the ETF portfolio at all times
It's extremely hard for any investor to correctly time the market over a multi-year period. In fact, it can be downright dangerous to try, as some research from the fund management group Fidelity proves -
  • The research calculated that £1,000 invested in the FTSE All Share Index in 1991 would have increased to £3,958 15 years later (2006)
  • However, if an investor had not been fully invested and attempted to trade in and out of the market (trying to buy low, sell high etc) but had been in cash on just 3 or 4 of the best performing days of each year then the original £1,000 would have only increased to £1,081 over the same 15 year period

I admit that following a strategy of being fully invested is not perfect, but then no investment strategy will ever be.

The downside to this style of investing is that when the markets take a big hit (such as 2001/03 and 2007/08) so will your ETF portfolio, although it is possible for the non-equity components to hold their own or even increase in value. Property for example was certainly a strong performer from the mid 1990s to at least 2005/06.

But there is a distinct advantage to always being invested - it's impossible not to partake in any upside movement in the markets as rising prices are the only way to make money in this game.

The main problems with attempting to successfully time the markets are threefold -

  1. It's hard to do - Never discount how difficult the markets are, they often look easy (especially with hindsight) but successful investing, like excelling at sport, is far from ubiquitous
  2. The time element - How long is it going to take to properly research the markets and come up with a decent investment strategy. Earning superior results from the markets takes a lot of time and effort (both mentally and physically)
  3. The consequences of getting it wrong - Even if countless hours of researching and planning is done there's no guarantee the investment decisions will pay dividends, they could easily lose money or lose the potential to make as cash is sitting on the sidelines waiting for lower prices, but the market powers ahead

Remember I'm only looking for a realistic annual gain of 6%+ so I'm not shooting for the stars and therefore my policy of at least being half invested at all times, if not fully invested, suits this aim.

But if readers think they can get better results by successfully timing, ie buying and selling at opportune times then by all means have a go. But here's an idea, think about keeping half of your portfolio fully invested at all times and the other half trying to earn better results by timing the markets.

Principle 3: Build A Portfolio Of Different Asset Classes
Already discussed on the previous page.
Principle 4: Reinvest all dividends and income
A balanced portfolio built out of ETFs will probably yield on average 3% a year via dividends/income. If income is always re-invested back into ETFs the beautiful effect of compounding starts to take over. So much so that without re-investing dividends any portfolio's value will be a shadow of what it could be in 5-10 years if the money had been reinvested.

Many businessmen will suggest the real secret to running a profitable company is always to focus on the costs, and I agree. The added advantage to controlling costs and hopefully being able to minimize them is that profits will always rise by default.

Start to think of your ISA in a similar fashion. Profits are earned by the investments you own rising in value, and there's little we can do to influence this (apart from build a sensible portfolio of different asset classes).

But we all focus on the costs and the easiest way to do this when managing a portfolio is to eliminate the fund managers by using low cost ETFs.

Good luck with your ISA portfolio, I hope you have found this guide and the strategies discussed useful.

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