Self-directed investing takes time, work, thought

So, perhaps you are ready to cut the strings from your advisor - or you already have. Either way, you have to know that successful investing, couch potato portfolios aside (which, I might add, are usually pretty successful over time), takes time, work and thought.

To take an example - let's say you ascribe to all of my lunatic ravings, and think that, yes, climate change is very likely to have an impact on your future returns, and the best way to get ahead of this is to buy a "climate change" ETF or mutual fund.

Humm ... first problem ... can't seem to find any .... oh wait, the Agitated Ecoist says there are apparently some already; just hop over here to the Fund Supermarket, run a screen with "Climate Change", as the specialist sector criteria and boom: three choices pop up.

Um, what to do - no problem, just equal weight all three right? And you are off to the races ... a losing race possibly.

Looking at the screen a bit more deeply, we can see first of all three have a distinct lack of momentum, as they have only turned upwards in the past month or so, with YTD, one, two, and three year returns all being significantly "in the red". OK, so that's one caution factor - fighting the momentum here, AND possibly the underlying possibly over-stretched valuations. Hard to know about the second, without taking a peek under the hood, as Random Roger often advises to do. Again, it takes work, but you wouldn't buy a dishwasher without a bit of investigation, so neither should you buy an investment product without a bit of investigation.

Let's take a quick peek under the hood of at one of these choices for illustrative purposes ... so I choose the first one, and eventually get through to the fund fact sheet. It informs that its investment policy is ...

The sub-fund invests in the FC share class of the DWS Invest Climate Change, which invests mainly in companies that are primarily active in business areas suited to restricting or reducing climate change and its effects: CO2 - efficient or energy-efficient technologies, renewable or alternative energies, climate protection, disaster prevention or management and energy-efficient mobility.

Um, yes, pretty much what I'd expect to see. A very quick scan of the major holdings appear to meet these criteria, for example, Vestas Wind is their largest holding at 4.8%, and there are other names recognizable to me that I think broadly fit this mandate. On the valuation side, the PE ratio isn't given, and let's just say that the past three years haven't been too kind to this theme - which tells me that likely they were or still are overvalued. But I'll leave that for later - I'd likely poke under the hood of four to six of their largest holdings to see what the PE is, to give me a sense of that. But I'll do that later.

And so I look at the second choice, which, despite different companies, looks much the same. Recognizable names that would seemingly benefit from a focus on spending for climate change; a beat-down on the price; and no single company of more than 6.3% of the fund total (Siemens AG in this case). OK.

And looking at the third - well frankly, why bother, the first two seemed more or less the same, right?

Well, that would be a mistake, because the Schroder fund is quite a different beast from the first two ... firstly, it does give some valuation metrics compared to the benchmark, and we can see that the fund does look relatively expensive. However, it's in the company selection where the rails seemingly go off the bus ... one of their largest ten holdings is a car manufacturer, WTF? Honda. It also includes Lowes - you know the one - Lowes Home Improvement. And how about Cisco also as their top holding? And a chemical company in the top ten too?

OK, they might be able to offer a rationale explanation, but on the face of it, and even after further digging, I doubt you could really convince me that Honda should be there - perhaps Bombardier if you are looking to add a transportation component (they make trains). How are Lowes, LOWES? Cannot rationalize that one at all. Investing in this particular fund, migth not exactly meet your personal investment mandate.

Anyway, the point is here ... that investing requires work, takes time, and you have to think. You simply cannot rely on the claims and statements of others, if you truly want to be successful at active self-directed investing.

On that note, may I say, "Happy investing" ...

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