Blindly trusted investments - what you need to look for
IN this second of a two-part column on the easy mistakes we could make in managing our investments and pensions, today I’ll give you some simple pitfalls to avoid.
Investment fund managers are paid to manage your money, and of course, wish to appear as attractive as they can to you, often doing that by extolling the virtues of their performance. You may have seen the Photoshop video turning a piece of pizza into a model?
You will may see investment funds (where your pensions and investments are placed) advertised as the ‘best performer’. But what is a good performer?
One common, irresponsible and recklessly outdated approach is to refer to a fund’s performance over the last one, three and five years. The natural response from the person being marketed to is that it’s an easy choice, after all it’s best over the short and longer term. So it must be best, right?
Very often, a fund won’t have been performing well and then has a spike in performance. This is often more to the pure chance they were exposed to a market sector (such as oil or retail for example) other funds were not, but more through luck than judgment.
That performance is all in the last six months but distorts the last five years and now throws all data out of kilter. Had we looked at the last six months in isolation and then the previous four and a half years in isolation, there would be a glaring gap between the two. Effectively, the fund is therefore only top over six months and average to poor over the four and a half years.
The unwary investor may now buy the fund thinking they have a winner, but in reality, they are buying a fund that has spiked in one sector. Everything that spikes, soon rebalances itself, normally after you have just bought it and lose money.
Studying past performance is a skill left to the very best, but undoubtedly you would want to look if there is any consistency in the performance of the manager. To do that, you would want to isolate down to smaller periods to take out the effect of all spikes and highlight them as a no go area. If for example your adviser studied each individual month of the last five years, the spike might be in just three of them. Consistency is key.
Another mistake to avoid is blind trust. Just because it’s a big marketed name doesn’t mean it’s good.
Many are caught with that blind trust and pay accordingly. For example, whilst the names Aviva and Legal & General are synonymous to strength and quality, the performance on one of their pension schemes is quite extraordinary.
Thinking you are invested with a great brand and that all will be well is a very expensive mistake. If I assessed a fund starting at £100,000 for a 20-year period, the difference between the top pension fund and the bottom three over 20 years was unbelievable.
Legal & General were nearly £460,000 behind the leader and Aviva were nearly £410,000 behind. An adviser with your interests at heart will not mind being challenged on the fund performance and choice of your funds, as they should have the answers.
Be careful with predictions. Columns and entire books have been written on the subject only for them to fall into a bin where they should have started.
It should be no surprise to those who follow the ‘pump and dump’ schemes that some journalists can be ‘taken to lunch’ to write a story on a market or share, only for you to buy at its absolute peak, before the market shifters dump it, having already bet on it falling.
The real reason for ignoring it: Financial markets have access to this data light years ahead of a journalist desperate to get a story in on deadline. Markets will already reflect the true price and the predictions will nudge it along toward a bubble, explained away by some erroneous excuse.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have an investment query call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net.