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How we invest and lessons learnt · On The Money

• 0:00
  Kyle Caldwell: Hello, and welcome to On the Money, a weekly bite sized show that covers investments and pension topics that aim to help you make the most out of your savings and investments. In this episode, I'm joined by Dave Baxter, who is a senior fund content specialist at Interactive Investor. Dave, welcome back to the podcast.
• 0:21
  Dave Baxter: Thanks for having me on.
• 0:22
  Kyle Caldwell: So Dave, the topic we're gonna cover today is how we've both invested over the years and the lessons that we've learned. And in doing so, we're hoping that this episode will provide plenty of food for thought for investors at different stages of their investment journeys. To kick off, I want to cover the main fundamentals that should ideally be in place before making a first investment. So for those that are thinking of making their first investments in 2026, firstly, it's very important to have a plan in place. This involves setting goals and objectives, thinking about why you're investing the money, what is the sort of time scale that you can afford to invest the money for, as this will help shape the types of investments that you then consider investing in.
• 1:14
  Dave Baxter: Yeah. And I guess there are few other kind of basic considerations. One is the kind of tax wrapper you're using. You know, most people are using ISAs or, you know, self invested personal pensions. Given that the the SIP, you know, you can't access it till your fifties, that can be potentially a kind of longer term, maybe slightly riskier prospects, where in ISA, you know, you might suddenly need to use it for some reason or other a few years down the line.
• 1:38
  So you might wanna take a slightly more balanced approach and maybe have a a bit less risk.
• 1:43
  Kyle Caldwell: And a key test to pass before you start investing is to have an emergency fund. So this is ideally three to six months of salary in an easy access savings account so that you can dip into that money if you need it. For example, if your boiler breaks, you can then dip into the cash savings to fix your boiler. And one of the reasons why you'd have an emergency fund is because if you don't have any cash savings in place to pay for an emergency, then you may end up selling investments at a disadvantageous time.
• 2:17
  Dave Baxter: And also, I suppose on the flip side, even when things are going well for your portfolio, say things are racing ahead, there's that kind of adage of, you know, don't get in the way of compounding. So you're kind of you want to keep as much invested as you can and then it will kind of grow over time and do better for you.
• 2:34
  Kyle Caldwell: I also think it's important to consider what type of investor you are. You might know what this is initially before you start investing, but on this, think about how committed are you to regularly reviewing your investments and how often are you willing to stay on top of them. As if you're a more hands off investor, that's completely fine. And if you if you do fit into that sort of category, there are certain types of funds that are more suited towards that investor rather than others.
• 3:07
  Dave Baxter: Yeah. It's worth touching on a few options and there are kind of multiple, you know, choices out there for you. You know, II for example, doesn't manage SIP, but also if you're looking to the fund space, you have well known franchises like Vanguard Life Strategy, which we will discuss later of course. You have rivals like Black Drops, My Map. And I guess also you could just potentially this is slightly less hands off, but you could pick a few sort of broad trackers yourself and pair them together.
• 3:34
  Kyle Caldwell: And the other thing to think about is risk. This is a very broad topic, so we're gonna go we're gonna cover this very briefly now. But one thing I would think about is how willing are you to tolerate a potential loss and weighing up risk and rewards. If you're a more cautiously inclined person, then you might wanna invest in a more adventurous type funds, which is a fund that invests in emerging market shares, for example. But I also think when it comes to to risk, there's also a risk of being too overly cautious, particularly if you're at the start of your investment journey and say you're your twenties or your thirties.
• 4:13
  You've got a long way to go. You've got a you've such a long time period to ride the inevitable ebbs and flows that come with stock stock markets. And over time, as you've mentioned, compounding should do its thing. And at the end of the day, if you look at all the historical data, it does indeed show that the best way to grow wealth over the long term is through investments rather than leaving it in a bank account because over time inflation erodes the returns that you get on cash savings.
• 4:45
  Dave Baxter: Yeah. And of course, there are things like, you know, regular investing which can help offset the ups and downs of markets. So you need to, I suppose kind of have as much risk as you can tolerate and then hold your nerve. But it is interesting the whole point about kind of how much risk you can take or volatility because I guess some people only find out when they're actually investing and then, you know, markets go one way or another and they will perhaps kind of adapt their approach as they go on.
• 5:11
  Kyle Caldwell: And another way to manage risk is to have a diversified portfolio. So this involves investing in a mixture of different types of funds that invest in different areas, different countries, different sectors, and also different asset classes such as shares, bonds, alternative assets, maybe even property. As if you if you have a diversified diversified portfolio, then over the long term, this helps to safeguard risk, but it also gives ample opportunity for your portfolio to grow and to hopefully grow in real terms and beat inflation. Yep. So let's now move on to how we've both invested over the years.
• 5:50
  So I'll kick off. So the first thing I did was in regards to my pension. I won't be going into details into how my pension's invested today. Instead, I'm gonna focus on my stocks and shares I use purely for time constraints with the podcast. However, the first thing I did when I was 22, 23 was to take a good look at the pension default fund that I've been put into.
• 6:16
  This was around a year after I started employment, and I was really surprised to see that it was a balanced managed fund. So it had 60% in shares, 40% in bonds. And, you know, in my early twenties, I just didn't think it was appropriate that I would be invested in a funds that has 40% in bonds. I mean, this this these types of investments, they're they're very defensive investments. That's where they sit in a well diversified portfolio.
• 6:45
  But I feel with the potential thirty five, forty year time frame, former pension at that point, I could be much more adventurous. And I switched it so that I had a 100 in global shares.
• 7:00
  Dave Baxter: Yeah. This is a common pitfall and one that I actually did fall into a few years ago. So many years ago, I think this must have been before auto enrolment because it was the first company I was working out that had kind of, you know, pension scheme. And at the time, I was quite pleased with myself because I'd maxed out my contributions, so I think I was contributing 6% something like that and my employer was double matching it, it was incredible. But I didn't look into the pension at the time and then it was only a few years down the line that I had a look and I realized I was in one of these kind of balanced funds and you know this was a period when you'd have huge gains for equity markets, so I'd missed out on even greater gains.
• 7:44
  So it is really important for people to actually kind of take the time to look at what they're invested in and as you say, of I guess max out that risk because you've you've got so long to ride those ups and downs.
• 7:55
  Kyle Caldwell: I'll now move on to how I invest my stocks and shares ISA. So I started the stocks and shares ISA around thirteen years ago. So in a former life, I was a personal finance reporter covering investments at the Daily Telegraph. And we regularly ask for managers, our Interactive Investor, and indeed, I did at the Telegraph, whether full managers have skin in the game, whether they personally invest in the funds or the investment trust that they manage. And I think with the job I do, it's important that I have skin in the game as well.
• 8:31
  So I started off by investing in a small handful of actively managed funds. I'm clearly at an advantage. I interview lots of managers. I've interviewed hundreds of full managers over the years. I've covered investments for fifteen years now.
• 8:49
  And I felt that I mean, there's lots that can be said about the debate between owning an actively managed fund, one that's managed by a professional investor, and just simply owning the market through an index fund or an exchange trader fund. My view is there's thousands of funds. There's far too many. And that can be pretty daunting, particularly if you are a beginner investor. But I feel like they both should have their place and warrant their place in lots of portfolios.
• 9:19
  I think it's I think mixing and matching between active funds and index funds or ETFs is a suitable strategy for lots of investors. And that's what I do myself with my own personal investments. But initially, I did did just have a handful of active full managers. It's all full managers that I've interviewed over the years. I felt like each full manager that I chose, they had a clear investments philosophy.
• 9:46
  They had strong performance over various time frames. And obviously, with an actively managed funds, you don't know from the outset whether the performance is gonna continue, whether that full manager will in future outperform the wider market. But one thing in common between all all of the five funds that I initially picked is that I felt the each portfolio was sufficiently different from the benchmark, the wider market that they were aiming to beat. So I felt that there was plenty of scope for the full manager to outperform and add value. And the funds that I initially invested in were Scottish Mortgage, Funds with Equity, Marlborough, UK special situations.
• 10:31
  Mhmm. And I also had a couple of emerging market slash Asia focused funds and investment trusts as I wanted my portfolio to have exposure to those fast growing economies that have favorable demographics, a growing middle class. As I feel like over a over a long time periods, that adventurous area, it is riskier. But I think if you've got a long term mindset, you know, it it can be particularly rewarding. So that's that's what I chose at the outset when I first started investing.
• 11:04
  How about yourself, Dave? What was what was your first foray into the wheels of investing?
• 11:08
  Dave Baxter: So I've had quite a different path to you. First thing, I'm very impressed that you started thirteen years ago because I only started about five years ago. I basically spent, like a lot of people, a relatively long time building up a deposit for a flat and you know, you there's the kind of rule that you shouldn't really invest unless you have say at least roughly five years to ride those ups and downs. So I didn't bother investing for a long time, bought flats, then I built up some of my kind of emergency savings again. Finally, we got to 2020, so you know, you had kind of more savings because you're stuck indoors and markets were doing some quite interesting things, very interesting time to watch what was going on.
• 11:52
  So we got to April 2020 and I started investing, know, which proved very beneficial because markets kind of surged for a long time. But yeah, I went in a different direction to you. I went with one of the Vanguard life strategy funds and the 80% equity funds and I did that for maybe a handful of kind of main reasons. So one is, as you mentioned some active funds can do really well and you can kind of mix and match passive and active. But I you know, had seen enough kind of research and enough data showing that active funds have struggled to consistently outperform so I thought okay, let's just go for a diversified take on the markets.
• 12:40
  And also it was kind of a psychological thing because you know, I love writing about funds and analyzing funds but I wanted to not have to do that outside of my day job as well. So I thought if I just buy a really kind of widely spread track of funds then I shouldn't really have to think about it and then I can just kind of ride at the market and as I believe we'll discuss, and there are also some interesting structural features to the life strategy range which kind of sets it apart from some other widely followed tracker funds.
• 13:15
  Kyle Caldwell: So there's five funds in the Vanguard life strategy range. Yeah. So they the equity content varies from 20% up to a 100. Yeah. Was there a particular reason why you went for the 80% version?
• 13:27
  Dave Baxter: So this was a an error, I suppose. Basically, I, you know, despite kind of focusing a lot on funds and kind of knowing quite a lot at that point already, I was slightly swayed by a good friend of mine who had also start investing and had gone with life strategy and he had gone with 80% because he was perhaps a bit more squeamish about the ups and downs of markets and didn't want so much volatility. And I without, I guess I was just focused on getting started investing and I thought, oh yeah, that makes sense to have a bit of a kind of a buffer. But in hindsight thinking, you know, I'm in my thirties actually, and I didn't really specifically need the money for anything, I just wanted to start investing, I should have just gone into 100% and just kind of taken on as much risk as possible. So it's a small area.
• 14:18
  It wasn't like a massive problem, but it will have limited some of my returns over that especially strong period.
• 14:24
  Kyle Caldwell: And as you've alluded to, there are certain features in the Vanguard life strategy range that some people view as a bit contentious. Yeah. So one of those is the the Vanguard life strategy funds. They have a home bias towards The UK. How did this come into your thinking when you chose that fund?
• 14:44
  Dave Baxter: I I quite like that feature because as we've, you know, discussed and written about to death, say that MSCI World Index has something like 70% in The US, so there's a lot of risk associated with if something goes wrong for a mag seven and so on. By contrast, yeah, life strategy, I think about half of its equity content tends to be in The US still, but you've got a quarter in The UK. So just quite like that because I think it diversifies you away from that kind of main market a bit and interestingly, if you look at the data, the home buyers so far hasn't really held life strategy back that much. Even when The US has been soaring ahead, it's still done pretty well. And then last year when The US lagged, it did especially well.
• 15:32
  Kyle Caldwell: I have a very slight b in my bonus over the home bias only because when I've asked Vanguard previously as to why the range has a home bias, the response I received was the, you know, they'd surveyed investors and potential new investors, and they found that investors like to have a home bias. Mhmm. So that's sort of like to me, that's sort of like led the decision making process in terms of why the range has a home bias. It feels like it's been built in because people have said that's what they want rather than it being that's what they should have or ideally need to have.
• 16:13
  Dave Baxter: I wonder if it's a nakedly commercial decision because you think if you look at that market, there already would have been something like an iShares MSCI World Tracker. So they have a lot of money, it would be very hard for Vanguard to come in and kind of beat them on scale and you know, undercut them on price. So I guess they're doing something deliberately slightly different and distinctive and that does seem to kind of, you know, struck a chord with people if you look at how much money is going into that range.
• 16:44
  Kyle Caldwell: So let's move on to how our investments have evolved over the years. So I'll go first. So as as mentioned, I started investing around thirteen years ago. However, along the way, I have needed to sell some of my investments. Mhmm.
• 17:00
  So I needed to sell some of my holdings when I got on the property ladder. And a couple of years ago, I sold the entirety of my stock and shares ISA as we were going through a property renovation, and I needed to use the money in the stock and shares I used help fund that property renovation. However, what what was really pleasing was the fact that, you know, some of my investments performed really well for me over the periods that I held them. Two of those being Scottish Mortgage and Funds My Equity. Mhmm.
• 17:36
  And they both beat the wider global stock market over the period that I held there, and they beat it quite convincingly as well. So that was very pleasing because, obviously, with an active full manager, that's what you want. You want them to add value for you over the alternative, which is buying the market for a very low fee. And I started building my stock and shares ISA back up again a year ago. And one of the when I reflected on how I put the portfolio together initially and how I've put it together now, one thing I've changed is that I have a global index fund alongside a global actively managed fund.
• 18:21
  Mhmm. So a lesson I've learned is that I did potentially overlook the benefits of global index funds or global ETFs as part of a diversified portfolio. The my my portfolio now is much more mixed and matched between active funds and index funds slash ETFs. So and again, what I've done is I I own a handful of different funds and investment trusts. I've once again bought Scottish Mortgage.
• 18:52
  So since I sold Scottish Mortgage, the lead for manager, James Anderson Mhmm. Is no longer the lead manager. However, Tom Slater was the deputy for manager of Scottish Mortgage for a long time, worked very closely with James Anderson. The investment approach hasn't changed. The focus is very much on finding disruptive growth companies and both companies that are listed and also exposure to private companies.
• 19:21
  And I really like that aspect because you can't buy those companies yourself. They're not listed. The private companies are stating the obvious there. And so and I again, as I mentioned earlier, one thing I I really look forward is that the underlying portfolio and how the full manager invests is very different from the wider and wider market. As I think, you know, if you if you you're trying to find those active full managers that outperform, Of of course, there's no guarantees.
• 19:52
  But if they're looking too similar to the index, then that's what you're gonna get. You're gonna get a return that is very similar to the index, and you can achieve that through paying less and just buying the index.
• 20:02
  Dave Baxter: Yeah. And it's interesting, isn't it? If you look at quite a lot of global equity funds, they are still very heavily weighted, say, the max seven stocks. So it is quite hard to get away from.
• 20:13
  Kyle Caldwell: And in common with how I put the portfolio together thirteen years ago, I've all I've still have exposure once again to Asia Pacific and the emerging markets. I'm investing my ISA now on a fifteen to twenty year time frame. I'm I'm looking to build this ISA to to to have it alongside with my pension Mhmm. And to potentially draw from the ISA earlier than when I can get my hands on the pension money, which, you know, it'll be in my late fifties by the time by the time I get there. So that so and because I've got that such long term time horizon, I'm willing to invest adventurously in pursuit of potentially higher returns over the long term.
• 20:55
  So Dave, how has your portfolio changed over the years?
• 21:00
  Dave Baxter: So I also have ended up cashing out of my ISA. That was also a couple of years ago. It was for kind of boring reasons and fun reasons. I basically ended up moving flat which had kind of associated costs and frankly I had some very fun and large kind of holidays and some fun money. So I need to basically get my ISO going again this year and that'll be interesting.
• 21:30
  I probably as a base will do something very similar. I imagine I will go life strategy again for now but I will learn from my previous mistake and go 100% rather than 80%. But it's interesting, mean given some of the things you said earlier to get me thinking, I guess one drawback with something like life strategy as with many kind of widely followed trackers is you're not really tapping into things like emerging markets. So maybe I would need to build a base with that one fund and then think about you know, adding some of the other areas. I haven't completely lost faith in active funds as well, so perhaps I could look at some more kind of new satellite holdings over time.
• 22:15
  But I guess it's just avoiding that mistake of you know, that many investors make of kind of adding many different holdings and ending up with this kind of sprawling unmanageable portfolio.
• 22:25
  Kyle Caldwell: Well, let's now move on to investment lessons. So I'll start off with a few things I've learned over the years. So when I went through the portfolio earlier and named some of the funds that I held, I did omit one, which was a absolute return fund. And I omitted it because I was gonna come on to it now. So this was a mistake.
• 22:47
  I shouldn't have bought it with the benefit of hindsight. And I made the classic mistake of not fully appreciating how the fund invested and how risky the fund was. So when I bought it, it all looked great on paper. The past performance, obviously, there's no no guide to the future, which I've thoroughly learned through that fund. It looked really strong over multiple different time periods.
• 23:13
  And when I bought it after a couple of months, it fell pretty heavily over that period. It was down around 20%. And for a fund, I just thought it shouldn't fall that much over a short time period. It's meant meant to give you a diversification, invest in lots of holdings. It's not a share.
• 23:31
  It's not an individual share. It's much more common that that might happen, but not with a fund. So I took another look at the fund. And when I gave it a more fuller sort of examination, I just said to myself, I don't really understand what the investment process is. It had the ability to short.
• 23:51
  So if a company so basically, a shorting is if a company share price falls in value, then the fund manager will make money out of that, which is riskier than the more conventional methods of profit and from share price gains. I think over that short time periods are held there. The shorten was the reason why the fund fell heavily. It could be it had certain shorts in place that didn't play out. The share prices actually rose rather than fell.
• 24:19
  And I, you know, I just made the classic mistake of not fully understanding what I invested in, so I swiftly exited. And in that scenario, I felt that was better to do rather than try and wait for a recovery to play out because, again, I was just so unsure about the future prospects for it because I couldn't fully understand how it invested.
• 24:41
  Dave Baxter: Mhmm. Yeah. I I think in terms of my mistakes, they're probably what I've mentioned in terms of maybe not taking on as much risk as I could, especially given I feel like I'm quite comfortable with the ups and downs. But I did want to mention, you know, I've covered funds for a long time and when I was working on Investors Chronicle magazine, used to be one of the people who have put together the portfolio clinic feature which is basically almost like an agony aunt column for investors. People submit their holdings, their portfolio, they will say what their kind of stated goal is, and then some experts will look at how they're invested.
• 25:18
  And there are a few very common mistakes I thought were quite interesting. And to mention one prominent one, it's I guess duplication. So you know, I've mentioned that I'm a fan of life strategy but you know those funds are variants of the same thing and quite often I would see people were holding say the 60% equity fund of Life Strategy alongside the 40% or the 80%, so they're getting this weird duplication and it's kind of complicating their portfolio more than they should. And just another form of duplication is people often hold US trackers alongside global trackers or you know, people have kind of direct UK shares so they hold HSBC for example in a large waiting but they'll also hold UK funds that have big exposure there. So it's quite good to just look at what your, I suppose, underlying exposure is because sometimes you do get that overlap.
• 26:16
  Kyle Caldwell: When I was putting the portfolio together a year ago, one thing I forced by a lot more was the percentage weightings to each funds that I invest in. Whereas when I started out, I think I was a bit more a little bit more scatter going. I was like, I'll put, you know, x amount into there, x into there. I wasn't thinking in terms of, like, the percentage weightings. Whereas this time around, I've, you know, try I've tried to ensure the the holdings that I view as more as core holdings.
• 26:44
  They comprise a greater portion of the portfolio. And those that a bit that are more satellite, more adventurous like the Asia Pacific and a major market funds that I invest in, that they comprise a smaller weighting in the portfolio in order to balance risk essentially.
• 27:03
  Dave Baxter: Yeah. Yeah. I guess it's interesting, you know, obviously, we've touched on something we published this week. Some of those kind of satellite holdings can race ahead and then they actually become quite a substantial part of your portfolio and it's kind of making you a bit too focused on something that's quite niche.
• 27:20
  Kyle Caldwell: And the final points I wanted to make is the importance of not beating yourself up if you make mistakes. Everyone makes mistakes, particularly when it comes to investments. So if you do make a mistake, the important thing to do is that it doesn't put you off investing and don't make the same mistake twice.
• 27:40
  Dave Baxter: Yeah. I mean, really the biggest mistake is not starting investing or, you know, pausing investing and then not getting back into it.
• 27:48
  Kyle Caldwell: I completely agree, which goes back to the point we made earlier about if you invest for the long term, the history books do indeed show that investing does tend to be cash quite considerably over the long term. And as we've mentioned, of course, there's no free lunch when it comes to investing, but there are various ways in order to reduce risk, including having a diversified portfolio, investing for the long term. As you mentioned earlier, Dave, regular investing can also reduce risk as well. So that's it for our latest on the money podcast episodes. My thanks to Dave, and thank you for listening.
• 28:27
  As usual, you can find plenty of insights and practical pointers on the Interactive Investor website, which is ii.co.uk. We love to hear from you. You can email us on otm@ii.co.uk, and I'll see you next week.