In my last blog I explored the dangers of going direct, and I want to explore this a little further.
The scenario which I painted took an example of someone who is very skilled in making “investments” into cash, and I think would be fair to assume thought they could take it a step further.
I have used many times before the example of a car or general DIY. With a car I would like to think I can drive the car (some may doubt this), and I can fill the car up with diesel. When there is something I don’t understand I can check the owner’s manual or go online but I know there is a point where however skilled I think I might be actually I need an expert to step it.
Investing is no different, I spend every day (almost) analysing the market, monitoring the portfolios we manage for our clients and testing what we think is right, is still right.
This is important because most people when asked how they select a fund will say it’s on past performance. To be honest I would put my hand up and say a few years ago for me that was the only measure I could base my decision on. But actually there is a skill to selecting funds, those who do it will use different measures but past performance is only one measure.
Think about gambling on horses, you bet five times and win five times. You are of course a genius or are you? Gambling is about luck, we can study the form and people do make a living from it but those who make a living follow a process.
Investing is the same, going back to my example I had a quick look at the cash fund the person invested in and it clearly states “the fund invests in the short-term money markets, such as bank deposits and Treasury Bills” and it goes on further to say “if the interest earned by the fund’s assets is insufficient to cover the product charges, the value of your pension will fall”. When making an investment this is the first thing you need to be reading.
The other point is around past performance, prior to 2009 the fund possible had delivered fairly good returns but from 2009 onwards it hasn’t and this is about understanding the future. We are currently assessing fixed interest investments, i.e. bonds. This is the second tier of risk.
Bonds have posted pretty healthy returns recently, but scratch beneath the surface and the future doesn’t look so bright. Without going into too much detail some of the performance is driven by what the market thinks interest rates will do in the future. If they think interest rates will go up then the bond fund might fall. There are of course ways to protect this but clearly from speaking to professionals they feel that bond funds will struggle to deliver anything but flat returns going forward. In fact a recent Barclays report indicated this would be negative.
Of course some bond funds may deliver short term positive performance and there are other ways to invest in the bond market but understanding this is important.
I am not sat here on a throne saying what a genius I am because sometimes we might feel something is wrong and move too early but what we have been able to do is deliver solid above average returns. The point is this we do this day in day out, and we are constantly learning and being challenged. Some direct investors will do the same, but as highlighted others will dabble with disastrous consequences.
My advice is that like our cars, understanding the limit of our capabilities is the first step and if we feel we can do the research then do it but if we have slightest doubt then pay for help. Despite what others might say in many cases this will be one of the best investments we ever make.