Today, I’d like to talk more about the third of my top ten tips for successful ISA investing, which is ‘Buy Quality Investment Funds’ (for more on my other nine tips, please just download our Top 10 Tips for Successful ISA Investing).
My aim is to invest when the market is healthy. When it’s unhealthy I stay in a cash-based fund to protect potential downside losses. The Fidelity ISA Cash Park is one I personally use.
I always use my ISA allowance to invest in quality investment funds, so any fund I choose must allow me to invest through my ISA. This means all of my gains will be protected from the taxman and I will never have any capital gains to pay on my profits when I move in and out of the market.
I like funds that are OEIC (open ended investment companies) and not unit trusts. If you see a bid and an ask price it means it’s a unit trust and those I don’t like because of the spread between the buying price and the selling price.
The key characteristics of quality investment funds
Performance is the most important element in choosing a quality investment fund. I make a point of discovering who the fund manager is and I look at their long-term performance results. I also check to see if the manager has been managing the fund over the previous bull market period.
I then look for the date the current fund manger started managing the fund, because it’s important to ensure the current fund manager is the one who scored the impressive results. Ideally, I want to see the fund manager outperforming the Nasdaq Composite in bull market periods. To achieve this objective I look at how the Nasdaq performed in previous bull market periods. I generally ignore how the manager performed in the down years (the bear market years), but if they beat the market in those years too, it’s a bonus.
Buying a fund late is also risky. This is when the chart pattern shows it has broken out of a base and is currently trading at 10% or more past its proper buy point. Funds extended past their ideal buy point are much more likely to correct after you have made your purchase. This would turn a possible temporary gain into a loss. The rule is simple; buying early or buying late adds risk. The aim is to buy at the optimum time, which is when the fund is breaking out of a sound base.
The investment funds I buy can invest anywhere in the world, but I prefer if the country the fund invests in has a strong and stable economy. Japanese, Chinese, UK and most European funds are always worth exploring as long as the fund manager’s performance is exceptional. I normally avoid funds that invest in unstable economies.
When I scan for funds, I always look for ones outperforming the Nasdaq Composite. I like to invest in a fund that is diversified, but if I find a fund that has a specialty in say one or two sectors, I ensure they are sectors likely to lead in bull markets such as internet, semiconductors, medical, telecom, retail, computer, metals and energy.
When the market is healthy, and it’s clearly in an upwards trend, one of the things I scan for is how funds are performing in the short-term. This short-term period action could be the previous day, week, month and possibly even the previous quarter. This is just as important as looking at the fund manager’s longer term performance.
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Please remember that past performance should not be used as a guide to future performance. The value of investments can go down as well as up and you may not get back the amount you originally invest.