Often the funds we talk about most are the best and worst performers – the double-digit deliverers and those that have plunged into the abyss. But the truth is that these funds are probably not suitable for most investors.
The fact is, that a lot of us are pretty risk averse and we’d probably choose steadier returns and peace of mind, over a rollercoaster ride and sleepless nights even if they do promise potentially greater gains in the end.
With that in mind, I loved reading about Anitta Aminoff’s investment journey this week. She’s been backing cautious funds and absolute return options, starting early and saving small, regular amounts every month. And by doing so she’s managed to buy her first home in London at just 26. What an incredible achievement! And it shows that you don’t have to ramp up the risk to achieve your financial goals.
The idea of doubling your money in a couple of months is obviously appealing, but that’s not investing – that’s gambling. True investing is having a goal, understanding how much risk you’re prepared to take, building a portfolio that can get you there, and staying put for the long-term.
Funds for All Seasons
Speaking of long-term investing, our analysis of funds that went from Hero to Zero was an eye-opener.
It’s difficult for any fund to deliver year in, year out but it’s surprising to see how far and how fast some can fall from grace. We found a raft of funds that were top performers in their category in 2018 but had sunk to the bottom of the pack in 2019.
While I don’t necessarily think that one bad year means you should sell, it’s certainly a red flag. Fund pickers often talk about managers who are able to perform “through the cycle”, those who can generate returns whether markets are rising or falling. If a fund is so volatile that it is flying one year and floundering the next, it suggests the manager may not have this ability – or that the fund has a specific strategy that is only suited to certain environments.
What is particularly interesting is how a fund can turn in what appears to be a decent return on the face of it, only for things not to seem quite as impressive when you delve a little deeper. You’d probably be pretty happy with a return of 17.6% in a year from a fund – until you find out that this was almost 10 percentage points below the average return in its group, and almost half what the top performing fund had achieved.
Research like this is a nice reminder to check in on your own portfolio to see how things are shaping up. And remember, it’s not just about the absolute return the fund has achieved – you have to put that in the context of its peers as well as its past performance.
Welcome to the Party, Pal
BlackRock was lauded this week for throwing its weight behind the sustainable investing movement, but I can’t help feeling it’s a little late to the party. Like, so late that the good snacks have gone and one of the friends you were hoping to catch up with has already left.
That aside, it’s a great thing that industry heavyweights are recognising the importance of sustainable investing and making it standard practice. BlackRock is going to offer sustainable versions of its model portfolios and, in the future, its iShares ETFs. It will also aim to reduce so-called ESG risk in its active funds, which means selling thermal coal producers and analysing the carbon risk of companies it invests in.
I hope we soon get to a point where sustainable investing is so commonplace that we don’t even need to badge it up as “sustainable”, it will just be standard investing.
