Should you invest in equities or bonds… or is there an alternative?
The challenges faced during the Covid pandemic underlined the importance of investment...
A very good friend of mine, millennial and loyal reader, delivered a particularly harsh reality at the weekend: she couldn’t find the answer she was looking for on FundCalibre! I immediately felt like I had failed. Her issue? “For a first-time investor, 200 funds is still too many.” And she’s right. She’s looking for one or two funds – her first ever investments – for an unexpected inheritance. She’s answered all the traditional questions like ‘what are your goals?’ and ‘what’s your time horizon?’ – she also understands her level of risk. The final step is heading to the list of Elite Rated funds and starting her research, to effectively select 1% of the fund research available to her. Easier said than done.
“May your choices reflect your hopes, not your fears.” — Nelson Mandela
The paradox of choice refers to the difficulty of making a decision when presented with many options – especially when all the options seem to have equal value. More choice is not always a good thing. In fact, it can decrease our motivation to make a decision at all, decrease our satisfaction with the choice we finally make, and increase negative emotions, like regret.
FundCalibre, at its core, answers the paradox of choice for many investors. We look at more than 3,000 fund options and narrow them down to a list of around 200. However, if it’s your first ever investment, even a list of 200 can be very daunting – especially when combined with the word research. You suddenly feel as though you’ll be wasting days or even weeks of your life – so what’s the point?
One of the best ways to combat this paradox of choice and reduce anxiety is to eliminate some of the options available.
If you already know your investment goals, time horizon and level of risk then you have a good understanding of what you’re not interested in. For example, if you are young and saving for retirement, do you need bonds in your portfolio? No? Then don’t look at those funds. There is such a thing as too much information.
Need a refresher on asset classes and their level of risk? Review our two minute guide here.
Are you curious about investment trusts? Yes? Great. Take time to read more about how they work. If you feel comfortable with the information, then start looking at individual options. You’ve already cut your list to 10%. Don’t invest in anything you don’t understand.
Once you have a clear idea of which asset classes and regions you’re interested in, focus on each one at a time. There’s no point comparing a ‘go anywhere’ global fund to a UK smaller companies fund. Those research notes, and risk profiles, will be very different.
Each Elite Rated fund or trust (and those on our Radar) have a fund note. On each note you will find information that can help you decide if this fund is for you. Of course, all the information is relevant, but that doesn’t mean it’s important to you. If I presented two investors with the same research note and asked each to list the three most important pieces of information, I guarantee that those lists would differ. For some, cost is the most important thing. Others will be more concerned with the fund manager’s experience – or even the top holdings.
Reviewing the opinion section for each note is an important step too, as it tells you exactly why we have chosen the fund and believe it qualifies as an Elite product. Then, of course, there’s the process the fund uses to make investment decisions and the risk score. Every fund and trust rated by FundCalibre includes a risk score from 1 to 10 (10 being the highest risk) to help guide you. This doesn’t mean the manager is a gambler, it simply means the asset class in which the fund sits is riskier.
All just a bit much for you still? Consider a multi-asset fund to take some of the stress away. Multi-asset funds are a ‘one-stop shop’ as they invest in a number of different assets and a manager changes this allocation around depending on what is happening in markets.
There are less than 20 multi-asset funds with an. Elite Rating, so it’s already a more manageable short-list.
Premier Miton Multi-Asset Monthly Income, is a ‘fund of funds’ and invests in a number of other Elite Rated products, for example TB Evenlode Income, GAM UK Equity Income, Montanaro UK Income and Man GLG Income*.
TB Wise Multi-Asset Growth sits in the ‘flexible’ sector and can invest up to 100% in equities. The fund generally contains between 30 to 60 individual funds and, as a multi-asset fund, the managers will balance diversification and risk, so you don’t have to.
Multi-asset funds can also invest directly in individual stocks and bonds, such as M&G Episode Income. The manager of this fund uses behavioural economics to find pockets of opportunity, which is particularly pertinent at the moment when investor behaviour has been so important.
*Source: fund factsheet, 30 June 2021