The Nasdaq hit a new record high this week; tech stocks are soaring. That sentence could have been written at any point within the past 10 years and not looked out of place. Yet it is strange to write it when we are still very much in the grip of a global pandemic, with nations across the world still in various states of lockdown and the economic repercussions yet to fully hit. That this record was hit in the same week it’s revealed the UK economy contracted by an unfathomable 20% in April serves to highlight, if nothing else, that the economy and stock market are very different beasts.
The stock market is, at its core, driven by sentiment – it reflects what investors are thinking and feeling. That markets across the globe have already started their recovery in earnest tells us investors are feeling optimistic and thinking a vaccine for coronavirus will be found. That the tech-dominated Nasdaq is at new highs tells us investors are feeling more reliant than ever before on technology – whether it’s family meet-ups via Zoom, remote working and schooling over Microsoft’s Teams, or contactless payments made with a single tap – and that they believe this trend isn’t going anywhere.
My concern is what happens when that optimism fades. Will a second wave of Covid-19 bring with it a second bout of stock market turmoil? Almost certainly, yes. That doesn’t mean we should sell up and stash our cash under the mattress, it’s (all together now) time in the market not timing the market that reaps rewards, after all, and we know the greatest gains tend to come very soon after the hardest falls. But I think it’s important not to have a short memory. If March’s sell-off panicked you into re-evaluating your portfolio, realising perhaps there wasn’t enough protection built in, don’t let this latest rally lure you back into bad habits.
Parent Power
One of the pillars Morningstar analysts use to assign ratings to funds is “parent”. The company behind a fund has a lot to do with how it is run, and while many investors may not give it an awful lot of thought, it should be a consideration when you’re deciding whether or not to invest. Some fund houses, for example, invest in a certain way – favouring growth, buy and hold, or a concentrated portfolio, perhaps. Other fund houses place a strong emphasis on ESG – BlackRock’s chief executive Larry Fink vowed to put sustainability at the heart of its strategies earlier this year. So, while individual fund managers have their own style and remit, undoubtedly they are influenced by their company’s approach. Indeed, it’s why we sometimes see them strike out on their own and set up a new fund firm.
Are some fund companies better than others? It depends on what you class as “better”. Still, the Morningstar bi-annual Top 100 Fund Families report is a helpful tool in making that assessment. Do you define “better”, for example, as the fund firm with the most rated funds? Or perhaps you think manager tenure is the key.
Vacation = Inspiration
I find our weekly Investor Views column, where someone gives us a sneak peek into their investment portfolio, endlessly fascinating. It’s a great insight into the different ways we make our investing decisions and the varying strategies people take when it comes to their portfolios. Some people are guided by cost, looking for the lowest priced funds for their returns, while others are loyal to their favourite fund managers, sticking with them for decades.
This week we heard how a trip to Vietnam inspired Rob Shearing’s choice of investment trust. While I’d suggest that sun, sea and Sangria aren’t the perfect companions with which to make investment decisions, I love the idea of taking inspiration from your experiences. I’ve said before I’m an advocate of investing in what you know works, and that's been good enough for Warren Buffett, who has built up a considerable fortune from picking up ideas from everyday life.
