UK Markets closed

3 golden rules for investing success

Malcolm Wheatley
A golden egg in a nest

Many of us invest – in shares, funds, investment trusts, and a few other things besides. I do, and have done so for years.
 
And my guess, given that you’re reading this, is that you do, too.
 
But what actually makes for investing success? The bookshelf in my office groans with various books on investment strategies and approaches to wealth-building.
 
Yet with rare exceptions – one being Burton Malkiel’s excellent A Random Walk Down Wall Street, for example, republished in a 12th edition this last February, most of these books don’t correlate wildly with what has worked for me.





Conventional wisdom

Sure, I’m a believer in diversification. But I don’t mind overloading on something that looks amazingly cheap.
 
Asset allocation is important, too – but I’m fully aware that I exhibit far too much home country bias, and that at times my asset mix is probably far more concentrated than it should be.
 
A judiciously-chosen mix of equities and bonds, with the proportion of bonds rising as one gets older? To be totally candid, I don’t do this at all, and never have.
 
Buying value, and yield, and – to some extent – net asset value? David Dreman’s Contrarian Investment Strategies – another one of those rare exceptions, and also published in multiple editions, a sure sign of a book’s worth – is loaded with common sense. Even so, applying screens and filters and investing solely on these criteria is fraught with danger.
 
So what has worked for me? What do I see as the biggest contributors to long-term success?  
 
Here’s my take on it.









Have a long-term perspective

Investing isn’t a sprint, it’s a marathon. Put another way, strategy matters more than tactics – the tactics, in this case, being stock-picking. Or, put yet another way still, time in the market beats timing the market.
 
What does that look like in practice? Various things.
 
Start early, and keep building. Don’t obsess over short-term price movements. Don’t chop and change, aim for ‘buy and hold’ long-term investing rather than short-term trading.
 
Act like an owner of a business, not a speculator.
 
And when the market throws significant opportunities your way, in the form of stock market ‘lows’ and sectoral declines, have the long-term vision to see that such things will be temporary.







Reduce your costs

Investing costs reduce investing returns. So the lower your costs, the higher your returns.
 
Put like that, it seems obvious.
 
And yet, for many investors, it seems that it isn’t obvious. They ‘churn’ their investments, clocking up additional costs each time.



They use high-cost platforms, or – worse – old-fashioned stockbrokers. They don’t structure their investment choices so as to lower their costs on their platform of choice, and they don’t always see the link between what they pay their brokers, and what is left to ‘pay’ themselves.
 
Why does this happen? Clearly, investment platforms’ complicated charging structures don’t help. And nor does the fact that platforms’ approaches to charges vary widely.
 
But investor apathy also plays a part.
 
My advice: take time out, and really get to grips with what you’re paying – and who you’re paying it to.





Tax-advantaged investing

As with costs, so too with taxes. Income tax, capital gains tax… they seem inevitable.
 
And yet, with investments safely tucked away inside ‘wrappers’ such as tax-advantaged investment accounts such as SIPPs and ISAs, investors will pay neither income tax nor capital gains tax.
 
Outside such a wrapper, taxes quickly mount. Basic rate taxpayers pay a dividend tax rate of 7.5%, which perhaps isn’t too bad. But higher-rate taxpayers, paying income tax at 40%, pay a dividend tax rate of 32.5%, while ‘additional’ rate taxpayers, paying income tax at 45%, pay a dividend tax rate of 38.1%.



 
To be sure, there’s the Dividend Allowance, which was introduced with effect from the 2016/17 tax year, and was set at £5,000, where it remained for the tax year 2017/18 as well. But it was cut to £2,000 for the year 2018/19, where it remains today.
 
Put another way, if your portfolio of income-focused higher-yielding shares exceeds £50,000 or so, then you’ll be paying income tax if those shares are held outside a tax-advantaged wrapper.


Bottom line

To me such things are the basic foundation upon which good investing decisions are based.
 
I’ll go further: these are essential building blocks of success. It’s pointless – for example – doing all that good stuff with (say) asset allocation or blends of equities and fixed-income, if investors then take a ridiculously short-term view of everything, or throw away their gains on costs and taxes.
 
Get the basics right first.



More reading

Motley Fool UK 2019