I’ve just had a look at a trading account I set up about ten years ago. And I’m delighted I did. What started as a £5k investment is now worth nearly £50k!
How did that happen?
Well, I can assure you that it had very little to do with my trading prowess. In fact, far from it. I think the chief reason the account did so well was because I barely touched it.
And this has been a bit of a wake up call for me. I’ve been thinking about it for a few weeks now and I think I’ve hit on something.
Let me tell you how you could use the same ‘hands-off’ approach to set yourself up for some very healthy profits.
Even modest sums can ramp up over time
It’s not every day you find nearly £50,000 lying around. But that’s what happened when I discovered the file of an old self invested pension fund (SIPP) while I was in France and clearing out some old papers.
In the file were all the log-in details and contract notes for a SIPP I set up back in 2000. I hadn’t forgotten that I had the account, but I knew it wasn’t a lot of money – so it kind of got lost.
When I set it up I was just starting my own business and wasn’t taking a wage. But I figured I ought to keep up some pension contributions, so for three years I put in around £1,800 a year.
Now if like me (at the time), you’re not earning, it’s worth noting that the taxman bumps up your contributions as if you are a basic rate taxpayer. So in reality my contributions were more like £2,300 a year.
And it turns out that these relatively modest sums have way out-performed any of my other pension arrangements. And I think there is a very valuable lesson in that.
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Two rules to super-size profits
As the cash went in, I bought some stocks that I thought would be good-old solid, boring long-term investments. This was a pension fund after all. And I think this is golden rule number one. Buy stocks that you are convinced are a great long-term investment, however unexciting they may appear.
And golden rule number two is easy: ‘do nothing’. Don’t tinker with it, just literally forget all about it.
Here’s what I tucked away:
Shell and BP – not earth shattering – but solid dividend payers (at least up until this year!) and a general commodities investment trust run by Merrill Lynch.
There was a FTSE 250 manufacturer of ingredients for the beauty and cosmetics industry called Croda and a Brazilian ports operator called Oceans Wilson which turned out to be an absolute cracker.
There was definitely a bias towards commodities and that’s served this fund incredibly well.
Keep on looking for the long-term stories
Now I know what you’re thinking. That’s all well and good. You picked up on a great theme for the last decade. But what are the chances of repeating this success?
It’s a fair point. But please believe me that ten years ago when I did my shopping, these really were pretty mundane stocks. I didn’t buy any explorers that were going to make me fortunes, no dotcom stocks, frankly no ‘punts’.
The commodities idea was based on long-term demographic trends. Of course today commodities and the emerging world story sound pretty sexy. But in those days they were relatively dull.
You see, there are fashions in the financial markets, just the same as anywhere else. The key is finding something that’s just starting to get fashionable, and is also under-pinned by long term factors.
Since I took over writing the Right Side around eight months ago, I’ve tried to put across what I think are the most important long term stories.
I’ve talked about oil, commodities, utilities, pharmaceuticals… mostly they’re ‘unsexy’ and defensive. But I only bang on about them because I genuinely believe that they should provide the backbone for long-term success.
Now I ‘love the thrill of the chase’ when it comes to short term trading opportunities and so long as I make more profits than losses, I’ll keep on with them.
But the discovery of the SIPP file has driven home just how important it is to remain focused on these long-term stories. I’m talking about the need to keep around 80% to 90% of your investment capital tucked away in ‘buy and hold’ stocks.
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Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798.
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