28 July 2016
Investing adages: 3 to forget and 3 to follow
By Sam Slator, Head of Communications
A few hundred years' ago, if you caught a cold, you might have been told by your local physician to crush some garlic cloves, mix them with a bit of milk and drink up regularly. These days, you'd probably expect a slightly more scientific suggestion.
The thing is, the remedy was possibly quite sound advice, based on the best available knowledge, at the time it was originally given. But the world is not the same place it was in the 1700s and while certain old wives' remedies have stood the test of time, others now sound a little dated. The same goes for investing adages.
We're re-thinking ...
Okay, to be fair, we're not saying these catch phrases have gone out the window completely. But the environments in which they were originally conceived have changed. What was once good advice may be worth a re-think.
Bond allocation to match your age
As we get closer to retirement, we want to take less risk with our money. If you're 60 and on the verge of quitting work forever, you don't want to lose your life's savings in a volatile investment. When you're younger, on the other hand, it's perfectly acceptable to take a bit more risk in higher growth assets to grow your nest egg.
One rule of thumb has been to have an allocation to bonds in your portfolio that matches your age – i.e. in your 20s, no more than 20% in bonds; in your 60s, at least 60%. This is all well and good, except the rate of return on fixed income or cash savings is not what it used to be and you might have 20 years or more in retirement! Yur finances need to last the distance, meaning you may need to keep a higher portion invested in equities than was suggested back when life expectancies were lower and interest rates were higher.
Don't fight the Fed
The theory goes that when central bankers are stimulating the economy, share prices will rise and so that is the time to buy. When they stop, so should you. The challenge, however, is that central banks have been in stimulus mode for eight years now and we're yet to see stellar economic growth. This is pushing the likes of Janet Yellen, Mario Draghi and Mark Carney into ever more experimental measures, whose effects on stock markets are unknown. Not fighting the Fed may have paid off for investors so far, but we think this is one to keep an eye on.
Cheap is best
Lower fees make for higher returns, the maxim says. Not always, we say. While you want to be fee conscious, we'd caution against this becoming your one guiding principle when choosing investments. A low fee investment like an tracker fund might save you some pennies in charges, but it also limits how much you could make on the upside – you will never beat the stock market in a tracker!
Active fund managers charge a fee for building a carefully crafted portfolio of stocks that they believe will beat the benchmark over the long term, bringing their investors higher total returns than they would have otherwise achieved. The key is choosing the fund managers with a strong, long-term track record of delivering superior returns and a good probability of continuing to deliver. Our [Elite Rating](/theeliterating 'What is the Elite Rating?) identifies the funds that we believe could do just that.
But we still like ...
On the flip side, there are some adages that have been good advice for the past however many hundred years and will still be good advice for the next few centuries to come, we reckon!
Don't put all your eggs in one basket
The number one investing cliché, but with good reason! Never invest all your money into just one or two assets, because if something goes wrong, you've obviously got a lot more to lose. While it can be really tempting, particularly if one fund is far outperforming everything else in your portfolio, to pile in more and more of your money, a single global event or even a piece of particularly bad company news, can cause values to tumble faster than you think.
Time in the market, not timing the market
An oldie but a goldie. There's been an awful lot of research over the years that has proved time and again that investors who try to “time the market”—buying at the bottom and selling at the top—aren't as clever as they think they are. Emotions get in the way and being out of the market for just one or two days can make a monumental difference. Figures* show that, over the past 30 years, if you had invested £1,000 in the UK stock market but missed just the best 10 days of market returns, your pot of money would be worth £7,812 compared with £14,734 if you had just stayed invested for the whole period.
Don't follow the fashions
A final enduring word of wisdom. Remember back when Kylie brought us The Locomotion and we all raced to our local salon to get a blond, voluminous perm? I'll be the first to put up my hand and say it wasn't my best look. Well, time has proved many investing fashions to be just as much of a faux pas as was my brief foray into the world of the Aussie pop icon. Just as my hairdresser timidly suggested my natural face shape and shading might be more suited to a sleek, brown bob, I would encourage investors to always keep their personal goals in mind when choosing investments. Don't get carried away on a 'tip' picked up at the pub or via a friend of a friend!
Where to next?
*Source: Fidelity, January 2016, using the FTSE All Share.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Sam's views are her own and do not constitute financial advice.
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