Terry Smith says there are only two types of UK investor. Which is best?

Terry Smith has built his reputation on being the UK’s best no-nonsense fund manager. He’s my kind of guy. 

As the head honcho at Fundsmith he’s driven market-beating returns for over a decade. And he’s got a specific piece of potentially life-changing advice for UK investors.   

Investing one way is super-difficult and fraught with danger. Choosing the other option? It’s “safer and more profitable”, according to Terry Smith. So it’s a wonder anyone chooses the wrong path at all. It’s only our livelihoods and potential pension pot at risk, isn’t it?

How it goes wrong

When stock markets are volatile — like the FTSE 100 is these days — then UK investors start to think one thing is important. Buying shares at the very lowest, nailed-on, absolute bargain price point: so-called ‘timing the market’.

This usually involves them holding back investments because they think a stock market crash may be coming. 

I can tell you now that I didn’t foresee March: the worst crash in 30 years that wiped a painful chunk from my net worth.

Trying to ‘time the market’ requires sifting through thousands of tiny variables. Covid, Brexit, demand for oil, the weather, how a single investor feels on a Tuesday. Any one of them could change depending its interrelation to another variable. It’s maddeningly complicated.

How to put it right

A much better way to invest, according to Terry Smith, is to use pound-cost averaging.

“When it comes to so-called market timing there are only two sorts of people: those who can’t do it, and those who know they can’t do it“, he told the Financial Times earlier this year. 

The method has only four steps. Do the research. Pick the finest long-term investments available. Then set a specific monthly amount. Pay that into a Stocks and Shares ISA or SIPP every month. 

It’s the exact same principle that got a young Warren Buffett so enamoured with his brilliant mentor Benjamin Graham. In the skyscrapers and boardrooms across the Atlantic they call it dollar-cost averaging, of course. 

It’s why I’ve set a target of £333 a month to invest in my Stocks and Shares ISA. I’ve proven with maths that this amount will compound my cash to £1m, given enough time! 

It doesn’t require so many hours sat staring at screens. It’s less stressful. It doesn’t require a preternatural ability to see the future. In my view, and Smith’s, and Buffett’s, it’s an all round better way to live.

Terry Smith rules

I get it. Stock portfolios can be addictive. It took me a while to learn this lesson and stick to it. But it’s provided me with much better results ever since I started.  

I buy my preferred stocks and shares when they are valued at a higher price, and a lower price. I don’t have to wince at paying a little more, because it’s automated. And my hard-earned cash is working to create passive income for me while I sleep. Or watch TV. Or go golfing.

If someone’s never heard of Terry Smith, by the way, the first thing I do is tell them to search him out. One of his best recent performances was at the Fundsmith Annual General Meeting 2020.  

In a world of snake-oil salesmen sometimes it’s just nice to hear sensible advice from a born straight-talker.