DIY Investor Diary: I invest so I don’t have to worry about money

In our DIY Investor Diary series, we speak to interactive investor customers to find out how they invest in funds and investment trusts, what their goals and objectives are, current issues and concerns regarding their portfolio, and what they’ve learned along the way. The aim is to provide inspiration for other investors, and we would love to hear from more people who would like to be involved. We do not require those featured to be named. If you are interested, please email our funds and investment education editor directly at: kyle.caldwell@ii.co.uk

Before committing money to the stock market, among the things to think about are what you want to achieve, how long you are planning to invest for, and how much risk you are prepared to take. 

Investors have different goals, with some playing the long game and hoping to grow their wealth to a size that allows them to potentially retire early or work more flexibly in later life.

This is a key motivation for the latest DIY investor to appear in our series that shares the experiences and investment strategies of interactive investor customers.

He says: “I’m investing to never worry about money. I want to have options, such as potentially switching to part-time hours. But ultimately, I want to have a really good quality of life. My motivation is to be comfortable.”  

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The finance manager, aged 50, started investing 20 years ago. He changed his workplace pension “default” fund from low-risk investments to higher-risk ones. “I then watched with amazement as it significantly increased in value over the next few years, which I eventually learned was mainly on the back of the success of the S&P 500,” he says.  

The DIY investor says that while there is a perception that investing is risky, the reality for investors who are patient and in it for the long haul is that the sum they have invested can grow significantly.

“For me, the risk is not investing. Of course, if you put all your money into one high-risk share that’s risky. But if you invest in a spread of different investment types, and invest for the long term, it can grow into an astronomical amount.”

History shows that the stock market has been an effective way of growing wealth ahead of inflation over the long term.

According to Barclays’ Equity Gilt Study 2024, UK stocks have on average returned 3.1% a year in real (inflation-adjusted) terms over 20 years. In contrast, cash has lost 1.8%. US equities have fared better, up by 6.4% a year over the same period.

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The DIY investor says that when he started putting money into his pension it was from a low base.

“My earnings were poor in that period, and I didn’t start a pension until I was 26, but encouraged by [the performance] I got into the discipline of paying 15% of my salary into my pension,” he says. 

“Later on, I had much better earnings, and despite having children and a significant mortgage, I maintained this savings’ discipline and opened a SIPP, consolidating workplace pensions as I went, and reading as much as possible about investing from free resources.”

The DIY investor has a self-invested personal pension (SIPP) and an ISA, with the latter smaller in size and containing higher-risk investments.

About 50% is held in tracker funds, which follow the ups and downs of a particular index, such as the S&P 500.

He says: “I like the fact they have low costs and often outperform managed funds.”

The US is the biggest single holding, but he recently switched his approach away from the more common market capitalisation weighted approach to an equally weighted approach. This is amid concerns about US stock markets becoming more concentrated following strong share price gains over the past few years for the world’s biggest technology companies, the “Magnificent Seven.”

To combat concentration risk, he bought Invesco S&P 500 Equal Weight ETF (LSE:SPEX).

“I just think those seven companies are now a disproportionate weighting in being around a third of the S&P 500 index. Over time, the world’s biggest businesses change, and in a decade’s time some of those companies won’t be as dominant.”

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He also owns iShares S&P SmallCap 600 ETF (LSE:ISP6) and SPDR S&P 400 US Mid Cap ETF (LSE:SPX4) to play the long-term trend of smaller companies tending to outperform larger companies.

Active funds, those managed by professional investors, account for 45% of the SIPP.

He explained how he separates the wheat from the chaff when researching funds.

“I look for long-term growth, a consistent investment style, and I like deviation from the benchmark even if it means periods of underperformance. I also don’t pay excessive fees.”

His biggest holdings are Fundsmith Equity, Slater Growth, Fidelity European Trust (LSE:FEV) and Stewart Investors Asia Pacific. 

He says that while both Fundsmith Equity and Slater Growth have seen their performances come off the boil over the past couple of years, he’s sticking by both managers – Terry Smith and Mark Slater (son of the late Jim Slater).

“I understand why both have underperformed. Rising interest rates hurt Slater Growth due to its smaller-company focus, while Fundsmith Equity holds much less than the index in the Magnificent Seven stocks. I think some of the criticism of Fundsmith Equity has been unfair, and it has still performed well over five years.”

Over that period, Fundsmith Equity is up 58.6%, slightly below the average global fund return of 61.9%.

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One tip he has for other investors is to avoid falling into the trap of having a home bias.  

He says: “I don’t invest directly in the dinosaur market that is the FTSE 100. I prefer the FTSE 250 because of the way it has performed historically, and recently bought the Vanguard FTSE 250 ETF (LSE:VMIG). It’s very cheap, and at some point will start performing again when interest rates come down. Meanwhile, it has a decent dividend while I wait [for that to happen].”

The remaining 5% is held in shares. High-yielding stocks are favoured, including M&G (LSE:MNG), which currently yields 9.3%.

Overall, though, he prefers to hold the bulk of his investments in funds.

He adds: “I initially used my ISA to invest in small-caps, inspired by reading Jim Slater’s book The Zulu Principle, but I had very mixed success, and quickly realised I was not a Jim Slater. 

“Like most investors, I learned a lot more from my mistakes than my successes.”

One painful learning experience was losing a sizeable chunk of his SIPP following Neil Woodford’s fund collapse.

He says: “The long-term lesson for me was that active fund management can be valuable as long as the manager sticks to his philosophies. It’s been well documented that Neil Woodford did not and changed his investing style.”