Over this series of blogs I have explored many issues
around financial management and planning, and one area I have mentioned is
around this perception that financial education is about providing information
around investment “opportunities”. This made me think how upside down we are in
our thinking.
The perception is that people understand what they
are investing for, i.e. what their goals are and as a result of this they know
how to achieve these goals.
Let me take this a step further, I have a car – I have
a choice when it needs servicing I can either buy a manual that tells me how to
do it or I can go to an expert. I know the expert will charge me but I am
putting my faith in them to do what I need doing. Now I can save money by doing
it myself I can buy the tools, the parts and fix the car. In reality I don’t know whether I have the right part and in the end I could end up having
to go to an expert to sort out my mess.
To be fair there are people who can fix their own
cars and know what they are doing and why shouldn’t they do it themselves. They
know when they need expert help and are prepared to take the risk that they
might get it wrong. They may turn to expert help via books, blogs etc but in
the main they will use their own experience and ignore all the noise.
In this blog I want to look at the art of
investing, I will expand on this in future blogs but I just want to question
the idea of financial education centring on investment “opportunities”.
Investing is easy, anyone can do it – that is true but it needs a lot of
thought and thinking. The problem is that for many they are looking for a
positive return and because of information overload the idea of short term
thinking is creeping in. We are also swayed by what is in the press, China is
the next growth story, China is dead, China is a tech bubble. This sways how we
invest.
An excellent example of this is the Fidelity China
Investment Trust managed by Anthony Bolton. This was promoted heavily by a
number of companies and many people invested in this fund. On the surface it
looked good – Fidelity is a well-respected global fund manager, China has seen
explosive returns and Anthony Bolton is an amazing fund manager. The papers
promoted this and well respected platforms wrote fantastic reports on the
prospects for this fund. However, consider Anthony Bolton had never managed a
China Fund and this was an investment trust. The point is cut through the noise
if you want to invest in China - is this the right fund to choose and is using an
investment trust the right vehicle.
Going a step further and looking at your goals is
China, however wonderful it may look, the right place to achieve your goals, or
should you diversify your assets. I am not saying emerging markets are a bad
place to invest in fact far from that personally I believe emerging markets in
turns of both equities and debt offer the greatest potential for returns over
the next 20 years plus. The point is you have to understand what you are doing.
Many people are disappointed with the performance
of the Fidelity China Investment Trust but did those people do their research,
how long are they planning to hold the investment etc. Most investments should
be long term and who knows whether in five years this fund may have performed above
its peer group.
The key is also diversification, if you invest all
your money in China and don’t spread your investments then you will suffer
disappointment because different sectors, regions, assets will perform
differently at different stages of the cycle.
And then we turn to individual stocks, we may all
have some shares but do we understand them. My father had shares in Barclays
and they were always worth around £10,000 after 2008 they fell in value and he
couldn’t understand it. In fact he didn’t understand anything about Barclays
and whether they were a good or bad company. Many people think they can pick a
winner when it comes to investing and some can. But this is no different to
investing in a fund are you looking short or long term? Another example is
Lloyds, are they a good share – possible they are at around 30p a share, they
have potential to grow over the next five years, but do you understand why? Or what about Apple could they become a $1,000 a share?
Often we don’t understand this level of detail and
therefore we turn to a fund or fund manager to do this for us. Turning back to
the Fidelity China Fund before we invest we need to do our research, what is
the process, what is the style, how does this sit with other funds in the
sector, is the fund too risky for the goals I am looking to deliver and what do
I know about the fund manager. We also hear cries that passive funds are better
than active funds so does the fund hug the index i.e. is the fund so large that all it is doing is buying the biggest companies that make up the index and are therefore quasi-tracker funds.
And of course building a portfolio is not just
about one fund it is about mixing funds to spread the risk. What this comes
down to is that investing is easy if you know what you are doing, papers and
platforms make us think that simple education makes us experts but unless you
know what you are doing you will get burnt. Paying an expert to diagnose what you want, identify
goals to achieve this and providing the solutions is I believe in
many cases worth it when compared to the pain of getting it wrong.
Take a step away from the noise - consider the average financial planner may charge you a fee of
1% per annum. In reality if you do it yourself you will be paying 1.5% p.a. - the assumption is that with the fee of 1% the financial planner charge is 2.5% p.a.
Consider again - when you go to a financial planner you will get rebates on funds and actually
the net cost may only be around 2% p.a.
The question you have to ask is whether
an additional 0.5% p.a. is worth peace of mind.
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