When we talk to investors about how the funds they are invested in were selected we usually find one of three things;
- They are invested in multiple funds across varying levels of risk and they don’t know how the funds were selected. They have no idea what the strategy is, in fact the existence of multiple funds across different risk levels is often a good indication that there is no strategy.
- They started out with X fund and as additional investments or single premium pension contributions were made additional funds were added. We call this ‘flavour of the month‘ fund selection. From time to time providers introduce new funds and for a time these funds are flavour of the month and are heavily promoted. If your adviser wastes his or her time attending life company ‘jollies’ they are likely to be influenced to select these funds.
- They and their adviser reviewed the recent performance of funds from the provider (which had already been chosen) and chose the funds which had done well in the last three to five years.
I don’t think I need to say any more in relation to scenarios 1 and 2 above, so I’ll focus on scenario 3.
Choosing funds based on recent performance is not only ineffective it is very likely setting yourself up for less than average returns. Research over the past several decades tell us that very few fund managers outperform consistently over the long term. When it does happen it is so rare that it is likely due to random chance rather than skill.
Imagine 10,000 people all flipping a coin. After each flip only those who get heads move on to the next round. After 10 rounds there is only one person remaining. Are they a coin flipping genius? No, statistically given the number of participants it was likely that someone would do it.
If you or your adviser have chosen your funds based on past performance you are likely to have a poor outcome. The only way you could make things any worse is if you review your investment periodically and switch out of funds which have performed poorly in the last couple of years and into funds which have performed well in recent years, because over the long term this strategy leads to a ‘buy high, sell low’ pattern of investing. This is called ‘chasing returns’ and a surprising amount of investors do it.
There is a better way. We are confident that if you talk to us about investing we can explain how we take the guesswork out of investing so that you can grow your investment without losing sleep worrying about the market.
Read our post about choosing an adviser here.
Contact us today on 01 546 1100, or book a video call with us here.
The material and information contained on this website is for general information purposes only. Neither the writer nor Highfield Financial Planning Ltd makes any warranty as to the completeness, accuracy or reliability of the information or the suitability or availability of products or services, referred to on the website, for any purpose. You should not rely on any information contained on this website as a basis for making any financial, legal, taxation or other decision. The information presented does not include all the considerations which are relevant to the topic discussed as to do so would render it un-readable. When considering any financial issue you should seek the advice of a suitably qualified adviser.
Warning: If you invest in this product you may lose some or all of the money you invest.
Warning: The value of your investment may go down as well as up. You may get back less than you invest.
Warning: This product may be affected by changes in currency exchange rates.
Warning: The income you get from this investment may go down as well as up.
