Question No. 4

"What Investments Are Best If I'm Going To Dip My Toes Into a
DIY Pension?"

Our Response

Let's be clear about DIY Pensions, you are limited to what type of investments that you can buy.

You can have in your DIY Pension the following type of investment:

• Company Shares
• Exchange Traded Funds (ETFs)
• Unit trusts and Open Ended Investment Companies (OEICs)
• Investment trusts
• Gilts and corporate bonds
• Cash
• Commercial property

There are certain assets that you cannot have in a DIY Pension e.g. residential property (although rules on this may change in the future).

But as far as this website is concerned, the only assets mentioned will be company shares (or equities as they are sometimes called), and ETFs (Exchange Traded Funds).

But we only invest in certain types of share.  We like to invest in value shares, growth shares, momentum shares and recovery shares.

And we only really use ETFs for one specific purpose, and that purpose is in a falling market.  The majority of the time we will be invested in company shares.

"So What Are Value Shares, Growth Shares, Momentum Shares and Recovery Shares?"

Investing in company shares, as everyone knows, can be risky.  But here at CommonSenseRetirementInvesting we try to eliminate risk completely and we do that by ONLY investing in "value" shares, "growth" shares, "momentum" shares, and "recovery" shares.

Well O.K. maybe recovery shares can be a tad risky.  But even then, we go that extra mile with our research.

What the heck are Value shares, Growth shares, Momentum shares, and Recovery shares, we hear you cry?

We'll start that off with a testimonial from arguably the greatest investor that has ever walked the planet - Warren Buffett.

He has built his multi-multi-billion empire by almost totally investing in value shares (the rest being in growth shares).

It's a technique that he learned from Benjamin Graham, his mentor.  But Buffett went on to improve what he'd learned from Graham to give the rest of us the knowledge that we have today.

You'll see repeatedly on this website the basic theme for investing in a DIY Pension.  And that is:  invest for the long term.  Exactly what Warren Buffett recommends.  And why would you want to pit your wits against him?

We do, however, add something else to our portfolios that Buffett and Graham probably wouldn't.  We invest a small proportion of our portfolio in Momentum shares and Recovery shares.

Investing for the short term can be classed as speculating.  At the very least, it's more risky.

Long term investing is a MUST do for the majority of your portfolio..

But it's not just about investing for the long term.  It's about quality as well.  And that means the individual shares that you choose to invest in are top, top companies.

The type of companies in question are fully described on this website.  So much so that you will not be left with any ambiguities.

If you want a tried and tested magic formula for being successful in the markets, then here it is:

market success  =  buy value (and growth) shares  +  invest for the long term

Now we were not very good at algebra when we were at school but even we can understand the above equation.

(N.B.  we've excluded Momentum shares and Recovery shares from the above equation to keep it simple)

"Two Important Questions"

usBut that equation begs two questions:

1.  How do wwe identify these type of share?  and

2.  How long term is, long term?

There are two techniques that we use in our investing and together they will give you the answer to the above two questions.

Firstly, we use Fundamental Analysis to find the above type of share in line with the criteria that is described on this website.

And secondly, we use Technical Analysis to let us know when it's the right time to buy the shares, or indeed the right time to get out of them (i.e. sell them).

It's important to recognise that a lot of the shares you will identify as "value" shares may remain so for a very long time.  Some investors call these "forever" stocks.

But we believe no share can be in that class "forever".  However, we do know of some shares that have been in that category for decades.

One such share is Unilever. (But more about individual shares on this website).

Even so, as long as these shares are classed as value shares, that doesn't mean that they are always a buy.

That's because the market's perception of what they're worth varies from extreme to extreme.  (that is, they become overvalued and undervalued, and anywhere in between).

And it is with this variation in price that we put to use Technical Analysis.  That tells us when the shares are a buy or a sell (or neither).

You could simply buy one of these shares and hold them if you like (forever).  But why would you?

If the market has them as over-valued for a period of time then move out of them and into another type of share that is under-valued by the market.

The ideal situation then is to buy a share when it's under-valued by the market, and sell it when it becomes over-valued by the market.

The time frame it takes for all this to happen depends on the volatility of the individual share and the market.  It could be days, weeks, months, or even years.

As you can imagine, there are shares that give a buy signal and don't give a sell signal for years.  That's O.K. too.  In fact, it's what you want.

But whatever, Technical Analysis will give you the answer.

It is therefore possible, in a 10 year period that you may have bought and sold a particular share over and over. 

It is also possible that you buy a share and never have to sell it.  That's unlikely, but it could happen.  Warren Bufett does it with most of his holdings.

And as long as the fundamentals remain within your criteria, those shares should remain on your watch list forever. Only when the fundamentals change need you consider ditching them.

Conclusion

Without going into too much detail in this short Q&A it is clear what type of investments are the best to put into your DIY Pension.

You first identify the type of share you need to buy, and these are known as "value" shares, "growth" shares, "momentum" shares, or "recovery" shares. You then decide if you want to hold them or maximise your returns by buying and selling them.

Fundamental Analysis will show you what shares to buy. 

Technical Analysis will show you when to buy them, and when to sell them.

N.B.  What CommonSenseRetirementInvesting is not, is a tip service.  We detail how to research company shares and time your purchases and sells, but what we are NOT authorised to do is recommended individual shares.

Footnote

As a newbie, you may want to read the other "Frequently Asked Questions" on this website.  Doing so, will give you a good introduction to running your own DIY Pension.

1. Home
›
2. Stock Trading FAQ
›
3. Best Investments For DIY Pension