17th February 2014 by Stuart Dyer
Are you a dedicated follower of fashion? If so, tread carefully when it comes to investing your savings – finance is as susceptible to fads as anything else and the results of falling for them can be disastrous.
At no time is this more apparent than in the final few months of the tax year, which ends on 5 April.
This is when the large fund managers and financial advisers really crank up their marketing machines.
Everyone gets an annual individual savings account (Isa) allowance, worth £11,520 in the 2013-14 financial year, but unused portions can’t be carried over – this gives the financial services industry the perfect opportunity to seek to persuade people to buy their investment products.
The first point to make is that Isas aren’t investments in their own right – rather they are wrappers that can be used to shelter other investments from tax. It is an important distinction because it is crucial to think about all your investments in the round – both those inside and outside of an Isa – rather than treating the annual allowances as a series of unrelated investment opportunities.
Just as crucially, remember that fund managers are trying to sell you a product, irrespective of whether it’s an appropriate product for you. The easy option for these firms is often to push a particular investment trend. There have been countless examples in years gone by. The fashionable funds each year have varied from products focused on dot.coms, gold, high-yield stocks, commodities and many more – the list is almost endless.
It never makes sense to invest in a fund because it is fashionable to do so, even if you think the arguments for a particular theme are compelling. That’s not to say these funds won’t perform well – they may or may not. But sensible investment isn’t about speculating or gambling; it’s a question of carefully constructing a portfolio that gives you the best chance of achieving your objectives.
That’s effectively a two-stage process. Having set your goals – these might be anything from saving for next summer’s holiday to building a pension pot – you can begin to think about the sort of asset allocation that will give you the best chance of achieving them. How, in other words, do you want to split your money between equities, bonds, property, cash and other investments? Next is the question of how to achieve that allocation. In other words, which funds do you buy to get exposure to each asset class?
You will also need to consider the trade off between risk and return. Are you comfortable with taking the sort of risk that certain asset classes will expose you to? Have you built a diversified portfolio of investments that will help smooth out short-term volatility in one area or another?
At no time during that process should investors be asking what the investment fashion of the moment might happen to be. Doing so won’t help you build a portfolio based on your goals and it’s also likely to make a mess of your risk planning.
Does that mean specialist funds are to be avoided at all costs? Not at all: these funds might well have a place in your portfolio; they may even provide useful diversity. But choosing such a fund as part of a sound portfolio planning exercise is a million miles away from picking one up because it’s the hot Isa investment of the moment.