Index funds vs Value investing principled stock picking: what I’ve chosen

I’ve been working up to this post for some time. About three years, to be accurate.

I learnt about index fund investing a long time ago. I’d heard of Jack Bogle, the leading light at Vanguard, God bless him. I’d read Warren Buffett’s comments about investing in and his very specific request in his Will.

Index fund investing and financial go hand-in-hand. Or so it seems.

That’s the way I’ve been investing now, for the past couple of years. It’s working for me: my portfolio is up roughly 12% this year.

As of yesterday, I held 100% of my ISA in Vanguard’s LifeStrategy 80/20. But that came to an end in the afternoon.

I ran some calculations, and currently I am at least 22 years away from reaching financial independence. Potentially retiring at 52 years old doesn’t sound too bad. But with that sort of time frame, I figured I could invest in something more aggressive.

That’s why I switched to Vanguard’s LifeStrategy 100% equity fund.

The LifeStrategy accounts are a very lazy way to invest. But with the amounts I’m investing at the moment, rebalancing exercises would be fiddly and the difference in fee is marginal.

Moving away from bonds doesn’t overly concern me. I’m fully expecting to lose half of my ISA in the event of a recession. But I know I will be ploughing more money into it during these dips, and hopefully it will flourish following any recession or serious market correction.

I have comfort that the fund is well diversified.

And yet, something is niggling at my brain.

Part of my job involves analysing stocks (note: this sounds like I’m incredibly well paid. I’m not!).

I read company accounts for hours each day. I keep up-to-date on market commentary and global news. My book shelf is filled with investing books.

My thinking is that maybe I should use this knowledge and put my money where my mouth is.

Could I return more than the market?

That would be a bold claim. But I’m willing to hypothetically try, without handing over cash.

For the average investor, who can only scrape bits of information together here and there, I agree that there probably isn’t much of a better alternative to investing in index funds. They are low cost, easy to manage and, in the past and over the long-term, returned money to investors.

I’m not saying that I’m better than average, which is why I’m keeping my money in index funds. Rather, I thought this would be a fun exercise and a way to test the water.

I’ve already identified several stocks that I would add to my imaginary portfolio. My investing style is focussed on value, where I can find it, and buying quality companies. I’m picking stocks for the long-term, so maybe a year isn’t long enough to evaluate whether this experiment will be a success.

From my analysis, I think the stock market in the UK for the most part is currently overvalued. This seems to run contrary to popular opinion, which states that due to uncertainty surrounding Brexit, the FTSE 100 is undervalued.

If my model portfolio runs well, then perhaps I will change my investing philosophy once more.

And if not, it’s all a bit of fun!

I’ll keep you updated in any case.

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