Andy Bell’s tips to build a successful long-term investment portfolio

“You can make investing as simple or as complicated as you want to. I favour simplicity and have always tried to make it as easy as possible,” he wrote in his book The DIY Investor.

According to Bell, there is no magic formula for investment success and the path to investment success varies depending on individual goals.

Andy co-founded AJ Bell in 1995, having spent many years working in the financial services sector. Born in Liverpool in 1966, Andy Bell did his studies at Rainford High School and graduated from Nottingham University in 1987 in Mathematics.

Bell took a sabbatical in 1990 for around three years when he somewhat got disillusioned with the financial services industry.

He spent those three years coaching football and tennis in America and did a lot of travelling.

When Bell returned to the UK, he resurrected his actuarial career and qualified as Fellow of the Institute of Actuaries in 1993, while working at a small actuarial consultancy.

Then he built AJ Bell into one of the UK’s largest investment platforms which has since grown into one of the largest investment platforms in the UK.

Bell also owned a popular shares magazine and specialist investment information websites MoneyAM, StockMarketWire, Broker Forecasts, Director Holdings and DIYinvestor.

In his book, Bell guides investors to plan their financial future and shows them how to build a long-term investment portfolio using a range of low-cost, tax-efficient strategies. He provides expert guidance and industry insights suitable for first-time investors and also experienced traders.

The book also showcases the skills and strategies investors need to take control of their investments and manage their money in the years ahead.

Let’s look at some of the strategies that Bell explained in his book which can be very beneficial for all investors:

1. Be patient

According to Bell, investing is not a get rich quick scheme and in fact, it is a way to get rich slowly.

2. Set an investment objective

Bell said if investors start their investment journey without a sensible set of objectives it is like going for a drive without deciding where they are going.

“Think about what you want to achieve in the context of an outcome and a time-frame,” he said.

Bell said investors need to take a call on whether they want to invest in shares directly or leave it to expert investment fund managers to look after their money.

Also, they need to consider how much risk they are willing to take.

“Think of your outcome as the destination, your investment strategy as the route you are going to take, and your risk appetite as how fast you are willing to drive to get there,” he said.

3. Diversification doesn’t mean having lots of investments

Bell said if investors were to follow one rule when investing, he would recommend diversification which is to spread risk and not put all eggs in one basket.

He says a common misunderstanding is mistaking owning several different funds for a diversified portfolio.

He said diversification is about understanding how different assets correlate with each other and spreading risk across asset classes and geographies.

“Equities, gilts (government bonds), bonds, property and cash are the five main asset classes and if you have a spread of these across different territories you are probably well diversified,” he said.

5. Do not ignore charges

According to Bell, costs eat into investment returns like a moth eats clothes hence it is easier to compare charges between different funds and investment platforms.

He said one fund manager or investment platform may be charging many more times what a comparable competitor may be charging.

“Buying direct equities is probably the cheapest option, but comes with the most risk. If you, like the majority of DIY investors, choose to invest in funds, then you can invest in active funds, where an investment manager makes calls on which investments to buy and sell. Or you can invest in the far cheaper passive funds, where the fund just tracks an index or basket of indices,” he said.

6. Define your investment goals

Bell said before investors do anything else, they must define their investment goals.

“A well-defined plan will ensure you focus on your targeted annual and overall return, your investment time horizon and also what you consider to be an acceptable level of risk. This will help shape which types of investment are best for you,” he said.

7. Understand risk and reward

Bell said risk is best considered as “losing your money” and he has seen many investors say they have a high risk tolerance until they suffer a big loss and then completely change their minds.

“Anything you do involves risk – even keeping cash in the bank, as your money is likely to be eroded by inflation and you may miss out on better returns elsewhere. The key is to ensure that any rewards on offer match your appetite for risk and overall investment goals,” he said.

8. Dividend reinvestment is crucial

Bell said stock markets are really get-rich-slow schemes and the strategy to follow for investors is to target shares or funds that pay a decent dividend yield and then reinvest it, so the power of compounding works in their favour.

“Around two thirds of total returns over time come from these precious payments and their reinvestment,” he said.

10. A bad stock in a good sector will outperform a good stock in a bad sector

Bell said certain sectors do well at certain times of the economic cycle.

“Picking the right sector will reduce the legwork and help you focus on certain funds, trackers or shares at the right time,” he said.

Bell came up with certain pitfalls that investors can avoid to achieve investment success:

1. It is important to take the emotion out of investing.

Bell said human beings are psychologically programmed to be bad at investing.

He said buying at the top of the market or selling at the bottom are two classic mistakes that inexperienced investors make.

“While not everyone can afford a financial adviser, one of the overlooked benefits is they help you hold your nerve in times of market volatility, and the good ones may even anticipate a market correction before it happens,” he said.

2. It is important to monitor your investments regularly, but be careful not to obsess over short-term stock market movements.

Bell said it was essential for investors to check their investments regularly and should avoid getting influenced by short term market volatility.

“A ‘sneaky peak once a week’ is a good rule of thumb for a long-term portfolio,” he said.

3. Don’t invest in something you don’t understand.

Bell said investors should avoid investing in something they don’t understand and are not comfortable with.

“This is difficult to apply in practice, as even expert fund managers don’t truly understand the businesses they invest in,” he said.

4. If you are investing in shares, you are buying a part of the company.

Bell said it is important to understand the basics of how a company operates, how it makes money and the outlook for the business.

“If you are investing in a fund, make sure you understand its investment objectives – then sit back and leave the fund manager to do what they do best,” he said.

5. Having a good understanding of the investments you hold and how they are expected to perform can take some of the mystery and emotion out of investing.

Bell said investors should keep things simple and set realistic goals and understand the level of risk they are comfortable with.

“No one will take as much care of your money as you will, but don’t forget that as a DIY investor, if it all goes wrong there is only one person you can blame. And remember, don’t be greedy and don’t be ignorant.” he said.

(Disclaimer: This article is based on Andy Bell’s book The DIY Investor)