Why my Isa contains just one substantial holding

One of the hazards of writing about personal finance for a living is that I'm occasionally asked for investment advice and "inside tips" by friends, colleagues or family members.

There are two problems with this. The first is that I can't legally give "proper" advice, the sort you could sue me for if it turned out to be inappropriate. The second is that I don't invest in the sense that most people understand investing. I don't have a share portfolio. I don't own any gold. I don't have a buy-to-let property (although I do own my own home). No spread betting or forex trading. There aren't even any open-ended funds in my Isa.

This might seem an amazing statement for someone in my position to make. But it's entirely consistent with my views on investing generally.

I do own a couple of investment trusts, as plays on smaller companies and emerging markets. But these are flutters on the side; the vast majority of my Isa money is in a single security, an exchange-traded fund that tracks the MSCI All World total return index.

I've owned passive funds alongside active ones for many years, but the idea to go a step further and own just one all-purpose vehicle came from Lars Kroijer, a former hedge fund manager and author of Investing Demystified. I agree completely with his reasoning for doing so.

The All World index consists of more than 1,600 stocks. The ETF probably doesn't own all of them, but it will certainly hold enough for me not to have to worry about diversification. I don't have to decide how much to allocate to Japan, how much to the US and so on. With an all-world tracker, the asset allocation is done for you. When the index is rebalanced twice a year, the country weightings change.

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I lay myself open to all the usual, and valid, criticisms of passive investing. I am doomed to underperform the index because of costs and tracking error. But on average and over time, most active managers do too - the evidence on this is incontrovertible - and their costs are much higher.

There is counterparty risk, although I can live with that given that the ETF is physically replicating, invested in liquid markets and run by the world's biggest asset manager.

I am effectively buying the shares or markets that have already risen the most (the top 10 holdings are all US companies) since all the world's major equity indices are weighted by market capitalisation. But so what? There's lots of long-term empirical evidence suggesting that momentum investing - buying stocks that have gone up the most - is surprisingly profitable.

But my main reasons for investing this way are not financial or dogmatic, they are practical and psychological.

I have a full-time job, a longish commute and a fairly demanding home life. I don't have a great deal of time to devote to masterminding complicated investment strategies.

< > I find the choice of active funds utterly bewildering. I know that there is precious little persistence in fund returns; past performance really isn't a guide to the future. I regard the idea of making qualitative judgments about individual managers daunting, and as I am prone to self-doubt, I would be forever fretting afterwards that I hadn't made the best choice or got the best deal. Plus, managers can leave or get fired, or their funds (or egos) can get too big. Funds run by computers don't suffer from these issues.

There may come a day when I have the time, cash and inclination to have a proper crack at doing what John Lee and others do so well. But in the meantime, I'll settle for what Greg Davies at Barclays aptly refers to as "anxiety adjusted returns". Time and compounding are working their magic on what has historically been the world's best-performing asset class, charges aren't eroding it, and I can get on with the rest of life.

This is my final Serious Money column as FTMoney editor. From next week, I am taking up a writing position in the FT's Lex team, although I will still be contributing to Money occasionally. It's been a privilege to edit the section and work with brilliant people over a fascinating few years, and I wish all Money readers the very best of investment success in future!

Email: [email protected]; Twitter: @jonathaneley

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