Secrets Of Success: The choice is huge, so make it smart

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The Independent Online

Ominous clouds are gathering for those inclined to be of a gloomy disposition about the current state of the markets. Rising interest rates and bond yields, a reported number of bond issues being pulled because of investor resistance, fallout from the travails of the Bear Stearns sub-prime hedge funds, a profit warning at Northern Rock and signs of mid-year stock market weakness – all these headlines point to this being an angst-ridden summer for investors.

It was ever thus: market phases follow their own momentum. Once you get a string of poor headlines, they tend to stay that way for some time. The big question is always whether or not you allow yourself to be jolted out of your previous state of mind by reading that others too (from Anthony Bolton downwards in this case) may be sharing the same anxieties.

My hunch, however, is that while we are still not teetering on the edge of a bear market, there is little doubt that we will eventually have a nasty credit crunch. At some point the reckoning for so many years of overly cheap credit will have to be made: and the fall out could be spectacular in some markets (in which I would include UK house prices) when it comes. Many investors are yet to become used to what a period of higher real interest rates might mean for them. When you can get a return of nearly 6 per cent on a two-year gilt, and more on the best bank savings accounts, you need a very good argument for piling more money into riskier or expensive-looking alternatives.

As this is my final column in this space, rather than dwell on these short-term factors, I prefer to concentrate instead on some broader ideas that have struck me as important over the past 12 years. There are some real positives to what has happened over this period – not least the way that a combination of globalisation, instant communications and the mass availability of derivatives (yes, even those too) have hugely expanded the investable universe.

I am old enough to remember the mixture of awe and dread with which old stockbrokers anxiously looked forward to a world of negotiable commissions, round-the-clock trading and American working practices arriving in the UK. But now, thanks to the arrival of exchange-traded funds, for instance, gaining instant exposure to faraway markets or specific investment themes has never been easier. (This week, for example, saw the launch of two ETFs that offer low cost access to an index based on the well-known CRB Commodity indices).

What this means is that most ordinary investors can now easily build broadly diversified global portfolios at minimal cost and then adjust their exposure to, for example, higher oil prices, or a Russian political crisis, as quickly or as slowly as they like. Whether they should do the latter is another question, but the fact that the freedom is now there is a huge step forward. So too is the range of choice now available on fund supermarket platforms.

The most important lesson that I have taken from my good fortune in being able to spend time with a few of the world's smartest investors is, to quote Warren Buffett one last time, that the real risk in investing is not knowing what you are doing. The less you know, the more you need to protect yourself against your own lack of knowledge.

The best way to do that is not by running off to some expensive-looking smoothie in a plush office for advice, which is likely, unless you are very wealthy, to cost you money in the long run, but by investing your money in as broadly diversified a DIY equity portfolio as you can sensibly assemble, with cash or bonds (if they are offering a real yield of more than 3 per cent) and property (ditto) as your balancing items.

The moral, in this as in betting on the horses, is simply that once you have your broad market exposure, you should never make any kind of additional bet until, and unless (a) you know what the odds you are facing are likely to be; and (b) you have a high degree of confidence in the outcome you have opted to bet on. Pass those tests and virtually anything in principle becomes part of your investable universe – though note that by definition, anything that offers exceptionally attractive odds is quite likely to be unfashionable at the time.

That means taking the trouble to read as widely as you can about the way that financial markets work, not just the reports and advice in the daily and weekly media (which can be dangerously misleading if you take their views too seriously) but also through books and the fast-expanding information resources of the internet, which are a boon to any discerning and serious-minded student of investment.

Books are still where the human race chooses to parade its most considered ideas and experiences, and everything you need to know about investment has been written down somewhere, if you know where to look. Only this year we have seen two outstanding additions to the canon of readable investment literature, in the form of Ken Fisher's The Only Three Questions That Count and Nassim Nicholas Taleb's Black Swan.

Don't overlook James Montier's fascinating collection of items about behavioural finance (the book is titled Behavioural Finance), which seeks to explain why we do so many irrational things with money. The corollary of understanding that risk is not knowing what you are doing, I would argue, is that, to quote an old saying, "if you don't know who you are, the stock market can be an expensive place to find out".

As for the internet, I can only marvel at how we all survived without the wealth of useful information and commentary that is now available at sites such as Citywire, Digital Look, Fullermoney. As someone who has opted to join the online publishing business myself, albeit in a modest way, it is a comfort to know that I shall not be losing contact with all Independent readers in future. Thank you for keeping me so well informed and on my toes.

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