Highly respected Investors Chronicle and Financial Times journalist David Stevenson is happy to practice as he preaches. In this special article for DIY Investor Magazine he shares his five rules for successful investing and considers the active vs passive conundrum.






Investing is a complicated business. There’s a constant din of noise surrounding every decision we make. Do I buy this or sell that? Are the bears right or will the bulls triumph? Which fund works for me? Should I go active and bet on a manager or should I stick with a simple, cheap passive index tracker?


I’ve been writing about investing for nearly 15 years – and have actively invested on my own for over 30 years – and I have learnt five very simple rules that I think hold true for most situations.


  • Keep it simple if you don’t have the time to run a very detailed process of due diligence. And by keeping it simple I mean make sure you are diversified and not taking too many punchy bets that may not work out.
  • Keep costs to the minimum although that doesn’t mean you should always buy the cheapest fund for instance. A smart fund manager who runs an active portfolio might be worth paying an extra 0.50% per annum over the very cheapest ETF. But given this, you should really never pay much more than 1.5% for any fund, ever even if it was run by the most amazing hedge fund master of the universe. Virtually everything about investing is uncertain except for the cast iron fact that excessive fees WILL destroy your wealth
  • In my experience in most markets most active fund managers fail to add much value for those fees I mentioned earlier. That’s not to say there aren’t great managers out there, many of them in the investment trust sector, just that they are few and far between. But one simple rule should help. In very developed, very liquid markets such as the US the chance that an active fund managers will beat Mr Market is incredibly low. Not impossible but just not very likely. That tends to mean that in the biggest asset classes I presume to invest in an ETF and not an active fund manager. The reverse is true in more complicated, niche markets
  • Stick with dividends over the long term. Dividends compound up and over many decades they become the major source of total returns. The good news is that these payouts can easily be captured by most fund structures
  • The biggest gains usually come from the most concentrated, contrarian bets where you’ve done your research and due diligence and decided that over the long term the consensus will be wrong. But timing is everything and you need to wait for other investors to capitulate and sell everything.


So, how do these ideas translate into building a portfolio of ETFs?


Sticking with the theme of lists I’d keep to these golden rules.


  • Make sure you are properly diversified with exposure to lots of interesting alternative ideas within both the equities and fixed income space. Be willing to embrace more contrarian ideas
  •  Stick with dividend orientated smart beta style trackers which capture the growth over time in dividends
  •  Never pay more than 1% for any tracker fund, ever.


If you do decide to go for an active fund manager – what to look out for


I think the best summary of what to look out for when it comes to picking an active fund manager comes courtesy of one of the best, John Chatfield-Roberts at Jupiter. He thinks a good fund manager should:


• have the necessary skills built into them. There isn’t an exam you can take to make you a good fund manager;


• be inquisitive, hardworking and ultra-competitive;


• have the ability to think independently and focus on what’s relevant rather than becoming bogged down with irrelevancies;


• have the humility to admit and rectify mistakes. After all, it can often take ruthless action to sell those severely loss making stocks that are hurting the portfolio;


• stick to a proven investment process even when it is not currently working in their favour;


• be sufficiently experienced, having been exposed to several market cycles; and


• be in tune with the psychology of the market”.


This is an excellent checklist of attributes that I think any investor researching a fund should focus on.


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