Small Investors Should Do Their Homework Before Committing Their Money

If you have money to invest and are trying to decide upon the best vehicle to grow your wealth, you may find yourself overwhelmed by the many choices available. How do you find the best balance of return, income and volatility? The answer depends on many factors, including your age, income, goals and the level of risk are you willing and able to assume. As a small investor it’s important that you do your research before committing your money.

Obviously, the information provided by fund managers, while not technically false, will likely be presented in a manner that reflects most positively upon the fund’s performance, with emphasis placed upon good performance benchmarks. Such presentations are developed as marketing tools, but can actually make it difficult for the novice investor or even more seasoned investors to compare the performance of different funds. An objective, experienced analyst who has no ties to any of the funds under review would be the wise choice as an alternative source of comparative performance information, since such a professional would be able to see how the different funds’ performance measures up to the others, and would be less inclined to approach one fund manager’s performance more favourably than another’s.

The Telegraph 25, which bills itself as the “definitive list of our [Telegraph’s] favorite funds” is one such popular resource, used by both DIY investors as a guideline and by experienced analysts to keep abreast of trends in the investments industry. Since the list is limited to 25 funds, it should not be considered to be comprehensive, with some very worthy funds not being included. As an indicator of trends and a starting point for one’s research, however, the list can be quite beneficial.

Beware of high fees for under-performing funds

During periods of “normal” economic conditions – if such periods actually exist – when interest rates and pound versus dollar valuations fluctuate, an astute fund manager can feasibly oversee fund portfolios in such a manner as to perform better than the overall index or market, to the point where the higher fees paid for more active management is justified by the portfolio’s higher earnings. The key phrase to consider, however, is “can feasibly”. In practice, no fund manager can guarantee such performance, and would face severe repercussions for making such a claim.

The last seven years or so have been anything but “normal” where economic conditions are concerned. Following the financial crisis, and for the seven years since, interest rates have been all but frozen, and the expectation is that they will rise very little if at all through the rest of 2016. Under such conditions, a given fund’s performing significantly better than the overall index should be considered an aberration, much more difficult to predict, much less plan a portfolio around. The result is that, for many investors, it can make more sense to invest in passively-managed funds, which strive to track rather than outperform an index or market. By reducing the fund manager’s efforts and the resulting management fees, a properly managed portfolio can continue to yield a net positive return, even when the return rates on individual funds are modest.

Of course all of the above is for informational purposes only. As is the case with any matter related to your personal finances, deciding how to invest your money is not a matter to be undertaken casually. Even for the DIY investor it’s generally prudent not to make any major decisions without consulting with a qualified professional adviser. An adviser can help you determine exactly how risky the investment will be for you and how well you will be able to withstand that risk. It’s your money: choose your investments wisely and don’t expect to get rich overnight.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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