Thursday, 17 May 2018

How to Choose a Fund

Fund supermarkets offer a good and low-cost service to retail investors.

However, the fund information provided is not always the best information to use when choosing a fund.

Yesterday, for example, I looked at a fund supermarket, picked a random managed sector, and picked ten funds at random. They all showed essentially the same chart.

Every fund out of thousands seems to say that their performance is great, i.e. in the information there's a line that is above another line. What if my investments were that horrible line at the bottom? I'd better buy the fund!

In the early days of my independent investment career, using charts like this gave me FOMO, so I bought a lot of funds.

Eventually I realised that by owning  so many products I was now the proud owner of a very expensive world tracker.

So, I now treat fund supermarkets as with any other shop - I like to know exactly what I want before I enter. I use other sources of research (Morningstar, general financial press, my own experience etc.), and compare different funds and benchmarks together.

I have a very clear idea of the geographical split I want and if I can't find managers who I am confident will beat the benchmark I select then I go for a cheap tracker.

Where I do have managed funds it's now with a limited range of individual managers who have a style I like (I read what they write, watch what they record, see how invested they are in their funds and look at their portfolios and activities). Alex Wright, Nick Train and Terry Smith are 3 examples of active managers whose funds I hold.

Having fewer funds and a small range of fund managers means that I don't fall in to the trap of merely looking backwards, I can make a judgement about how well placed the managers are to preserve my wealth in the future.

Bottom line, fund supermarkets are a very good service, but the choice is huge and the fund information on the sites a sales pitch. So I do plenty of research of my own, and go in there to buy only what I've already selected.

The Rural Investor

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