Investing Under 30 (2) – The Bonkers Approach
Posted by: Brian Dennehy
Last time (Investing Under 30? You Will Want Some Of This) I looked at how to give you a realistic opportunity of funding a gap year in your 30s – an enticing possibility based on the evidence of where the greatest opportunity lies in the years just ahead. Moreover, it was based on what I did myself from the late 1980s, and it was hugely profitable. This week I go off-piste – it’s Bonkers!
Before coming on to explain the Bonkers approach (which is extraordinarily straightforward) I will start by sharing with you what three under 30s currently who use our research, all of whom save/invest monthly into funds. I will call them 1,2, and 3 to preserve anonymity. I asked them some open-ended questions around how they might advise their friends, and what they are doing themselves.
“I put most of my monthly savings into Premium Bonds for a house deposit later. For longer term savings I put this in the Bonkers Portfolio. I haven’t got the time to think about this too much, but the evidence for Bonkers was so clear I just went for it. I found myself in AI recently. No idea what it is, but it made me money!”
From watching the progress I’ve just accepted that the value goes all over the place, but I’m OK with that.”
No.1 also said “I’m still pretty clueless” – but no.1 just took a common sense approach, and followed the evidence of success.
No.2 (the youngest) said:
“Set aside money every month through a direct debit, make sure you can afford it, and increase it when you can… Keep a record of when and why you bought each investment. This will eliminate you thinking “why the xxxx did I buy that 8 months ago”. Keeping a record is the most important building block for novice investors.”
No.2 is obviously very engaged in this, and also follows Bonkers. No.2 saves the money on deposit each month, rather than a DD straight into funds, and then invests that as a lump sum every 6 months – a case of do what I say, not what I do! This is fine as long as you are disciplined – my own experience is that most people (young and old) are not that disciplined.
No.3 is the oldest and also very engaged with investing.
“A lot of people my age think investing is like gambling. So, they either do nothing, or turn to exotic get rich quick schemes… They need to think of investing as a regular habit, like paying your phone bill. Investing regularly will mitigate your risks by averaging out the price you pay and smoothing your journey…
Have a strict process and follow it religiously, taking as much of the complications out of investing as possible, and make it easy but effective… Have a review period every so often so you can reassess them and not become emotional about the daily/weekly moves and make rash decisions.”
I got all of this feedback before I published part 1 in this series. What really impresses me is how methodically and thoughtfully they approach this task – amongst my generation I feel that this would have been a very small minority when we were in our 20s. I am really encouraged by this.
So what is Bonkers?
I explained last time why investing in the stock market is a great way to make your money work harder – there is probably no better way.
But “the stock market” is not really singular. There are many stock markets around the globe. For example, in part 1 I extolled the virtues of emerging markets – they look extremely cheap compared to alternatives. There are four ways to do even better than the stock market indices (outperform), and there is more on that here
In simple terms, one of those is to buy what is cheap without good reason – what is called Value investing, and that applies to emerging markets right now.
Another approach is to buy “winners” – this is Momentum investing, and the evidence for its extraordinary success sits behind our Dynamic Fund Ratings, and you can see more on the evidence here
If you are investing lump sums, we advocate using our Dynamic Fund Ratings to build a portfolio based on a spread of funds based on your attitude to risk – all very sensible. But if you are very young, you have a very long time to invest, and the view of many (including myself) is that you should take as much risk as possible. I will return to what “risk” means in this context e.g. “can I lose all of my money?” is always a pertinent question! But first, what we call our Dynamic Bonkers Portfolio.
There are thousands of different types of funds, and they sit in a myriad of sectors e.g. one for UK stock markets funds, quite a few for different types of bonds, one for China, and one for more exotic funds (“Specialist”) which might include anything from gold to India.
With the Bonkers Portfolio we bundle all of those thousands of funds together, look back over the prior 6 months to identify the top-performing funds (the winning fund), and then invest into that for the next 6 months. After 6 months we repeat the process, replacing the winner from 6 months prior. Our own very detailed research, stretching back over decades, and that of many others, confirms that this 6-month period is optimum. (P.S. we call it a “Dynamic” portfolio because every 6 months you are proactively switching into the latest “winning fund”)
But it does mean that you can swing from zany gold for one 6-month period, then to sensible government bonds in the next, and then followed by an incomprehensive Artificial Intelligence fund. The key is discipline – don’t try and out-think the selection – just buy it. Why? Because…
The Growth Is Bonkers Too!
You will recall last time that the projected returns from emerging markets are 10% per annum. By comparison the actual annualised returns from this Bonkers Portfolio over the last 10, 20, and 25 years are 17.5%, 17.6%, and 19.5% respectively – remarkably consistent at this high level.
In chart 1 below you can see the Bonkers Portfolio versus the UK stock market over the last 25 years, and in chart 2 versus the US stock market (as that is regarded as the star of the last 10 years or so).
Bonkers vs. the FTSE 100
Bonkers vs. the S&P 500
Strictly speaking risk is the likelihood of you losing everything. As you are invested in funds here, you are inherently diversified, and over 4 decades I know of no fund where you would have lost everything – this is a highly regulated environment, probably over-regulated relative to the risks.
So, when we talk about risk here it is really about the ups and downs in the value from day to day – which is volatility.
To consider this in a meaningful way we look for the worst months over the last 25 years. For our Bonkers Portfolio it is slightly less than emerging markets, and both about 3x greater than the mainstream UK stock market (FTSE 100 index).
On the other hand, since 1995, the return on the Dynamic Bonkers Portfolio is a massive 11x that of the UK stock market. Let’s be clear. If you invested for the next 25 years and achieved similar returns, your pension fund, for example, would generate an income 11 times greater than you would have achieved by investing in a fund which just tracked the UK stock market – the latter is called “passive investing” – I can think of other less complimentary names for it!
Gap Year In 10 Years?
Last time we calculated that with “just” 8% growth in your money every year, in 10 years you would have accumulated enough to pay for a gap year – actually an amount equivalent to two whole years net salary! £36,457.
Over the last 10 years, the Bonkers Portfolio achieved nearly twice this amount - £65,536. (see Table 1 below).
And over 20 years it achieved nearly 3.5x as much. So, an 8% growth rate is very good – but Bonkers is, well… bonkers!
I am running out of time now, so I am going to have to include the actual fund recommendations for next time, Part 3 in the series “Investing Under 30”. Do let us have your feedback.
Table 1: Bonkers vs. FTSE 100
8% growth (£)
(This assumes investing £200 per month growing based on either the annualised Bonkers performance or an assumed 8% annualised growth rate, both compounding monthly)