In this new series of posts we're going to look at 7 of the most common mistakes that investors make. In this post, we'll start by looking at maistake number 1, 'Making 'low fees' the highest priority'.
If you would like to know more about this and other investing mistakes to avoid, please just download our free report The 7 Biggest Mistakes That Investors Make.
Charges are important, but not as much as returns
Let me be clear – when investing in funds, I always aim to keep my fees, charges and costs low. For example, I encourage you to fight for every percentage point by using ISAs and SIPP wraps to protect your gains from the tax man. I also strongly recommend you manage your portfolio on a low-cost dealing platform that offers ‘clean’ share class versions of the funds you wish you purchase.
The mistake investors make is therefore not with aiming to keep fees low – instead it’s when investors make low fees their ‘highest priority’ when deciding which fund or funds to buy. For example, even though the ‘Ongoing Charges’ of a fund are something I always pay a lot of attention to, in my opinion this is not as important as the future expected return of a fund. My feeling is, what’s the point of buying a cheap fund if it underperforms the market by a wide margin?
Instead of focusing on the cheapest funds, my suggestion would be to seek out funds that have low ongoing charges but focus on the ones likely to help you ‘beat’ the market. When I search for funds to buy, I focus on the ones being managed by exceptional fund managers, especially ones that are right in the middle of the money flow. I like to make sure the fund manager has proven they can beat the market in the short and the long-term.
Compare against the strongest index in the world
To do that you simply compare the manager’s performance with a benchmark, such as the FTSE 100, the S&P 500 or the NASDAQ Composite. I like to use the NASDAQ – the US technology index – because it’s arguably one of the strongest indexes in the world. When I see that the fund manager has beaten the NASDAQ in the short and long-term, it tells me I’ve found a star and it also tells me the manager is probably going to continue to perform well in the future.
Of course there are no guarantees they will continue to outperform but I like to think in terms of probabilities. In my mind, fund managers are like football managers. The best managers have a strategy that works. However, let’s not forget that fund managers also have mandates. A mandate tells the manager which types of stocks they have to invest in. For example, their mandate may state that they have to invest in UK stocks.
This might not seem so bad but if the big institutional money is not flowing into UK equities, it puts the manager at a disadvantage and means trying to beat the market will become an even more difficult task. Because they are restricted in this way on what they can and can’t buy, sometimes you see star-performing fund managers not continuing to perform well. Star fund manager Anthony Bolton is a good example of this.
Search for managers outperforming the NASDAQ Composite
Therefore the reason why some top managers with great track records stop performing is not because their strategy no longer works, but because the money flow has moved out of the areas they have to invest in. In Anthony Bolton’s case, he was restricted with only being able to invest in Chinese equities and during the time he managed the fund, the Shanghai Composite (Chinese main index) was performing horribly, which means most Chinese equities were heading down instead of up.
The key then is to search for fund managers that are outperforming the NASDAQ in both the short and long-term. Once I’ve found a fund that’s suitable, I then stay fully invested in the fund until I see the market’s major trend change to a downtrend, or if I see that the fund is starting to underperform. My mantra is, stick with your winners and dump your losers.
Remember, if you would like to know more, please just download our free report The 7 Biggest Mistakes That Investors Make.
As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.
ISACO specialises in ISA and SIPP Investment and is the pioneer of ‘Shadow Investment’; an easy way to grow your ISA and SIPP at low cost. Together with our clients, we have an estimated £57 million actively invested in ISAs and pensions*. Clients like us because we have a great track record of ‘beating’ the FTSE 100**. Over the last 16 years, we’ve outperformed the Footsie by 60.2% and over the last 5 years, we’ve averaged 14.5% each year versus the FTSE 100’s 8.8%. You can find us at www.ISACO.co.uk.
What is Shadow Investment?
Picking the right fund for your ISA and SIPP is not exactly the easiest job in the world. And knowing 'when' to buy and 'when' to exit is even more difficult! Our ‘Shadow Investment’ Service is here to help. Our service allows you to look over our shoulder and buy the same funds that we are buying.
When we are thinking of buying a fund, we alert you so that you have the opportunity to buy it on the same day that we buy it. We also tell you about when we are planning to exit the fund. You control your investment account, not us. You can start small and invest as little or as much money as you like.
By knowing what we are buying, when we are buying and when we are exiting, throughout the year you can mirror our movements and in effect replicate our trades. This means you have the opportunity to benefit from exactly the same investment returns that we get. Our investment aims are 10–12% per year.
We are totally independent, fully transparent and FCA compliant. We’re warm, friendly and highly responsive and it’s a very personal service that gives you direct access to the Sutherland brothers; ISACO’s two founders.
Who are ISACO’s clients?
Clients who benefit most from our service have over £250,000 actively invested and the majority of them are wealthy retirees, business owners, self-employed professionals and corporate executives. We also have clients from the financial services sector, such as IFAs and wealth managers.
Do you have questions?
To have all your questions answered, call 0800 170 7750 or email us at: info@ISACO.co.uk.
*November 15th 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients.
**Long-term performance: December 31st 1997 - December 31st 2013 ISACO 91.3%, FTSE 100 31.1%. 5 year performance: December 31st 2008 - December 31st 2013. ISACO Investment performance verified by Independent Executives Ltd.