'Must haves' make mugs of investors

Bonds are the new black, but once upon a time so were tech funds. Clare Francis looks at the dangers of following financial fashion

This might be the season of high style, as London Fashion Week gives way to the catwalks of continental Europe, but dedicated followers of fashion don't con- fine themselves to clothes. Investors can also be dazzled by what's in vogue when they choose financial products.

This might be the season of high style, as London Fashion Week gives way to the catwalks of continental Europe, but dedicated followers of fashion don't con- fine themselves to clothes. Investors can also be dazzled by what's in vogue when they choose financial products.

The result is often an eclectic mix of holdings that don't meet your investment objectives. What's more, if you're following an investment fashion, you may well be going into that fund at the wrong time.

"For it to be fashionable, demand [for a fund or sector] will have hit a crescendo and a lot of people will be getting in at the top," says Philippa Gee, investment strategist at independent financial adviser (IFA) Torquil Clark. "Canny investors would have put their money in a lot earlier."

With stock markets so volatile and many investors suffering huge losses over the past three years, those bold enough to invest more money are likely to look for the current top-performing funds. This is a dangerous move.

"Yesterday's performers aren't always the performers of tomorrow," says Phil Wag- staff, managing director of UK retail investment at M&G.

Hi-tech funds are a case in point. Figures from Standard & Poor's show that people who invested in Aberdeen Technology in March 1997, before technology funds had become fashionable, would have seen the value of their investment climb 400 per cent by March 2000.

This was the height of the tech boom and returns like this meant investors couldn't get their money in fast enough. Over £900m poured into tech funds in March 2000 but performance since has been poor. Anyone investing in Aberdeen Technology at this point has seen the value of their investment plummet by 85 per cent.

It's a stark example of how a fashionable investment decision can go horribly wrong. Even first-time investors piled into tech funds without fully appreciating the risks. "The irony is that what investors want to buy doesn't often tie in with what they ought to buy," says Mr Wagstaff.

Funds that invest in continental European compan- ies also have strong support. Sales figures from the Investment Man- agement Association (IMA) show that Europe was the second most popular investment sector in 1999, 2000 and 2001. But it too is suffering at the moment.

A popular alternative to equities has been buy-to-let, particularly on the back of the housing boom. But, again, this market has peaked. A glut of rental properties has led to lower yields and many landlords struggling to find tenants. The people who have benefited most from buy-to-let are those who got into the market over five years ago.

"People have been making decisions they wouldn't normally consider, such as technology and buy-to-let," says Kerry Nelson, senior investment adviser at IFA Bates Investment Services. "But rather than getting caught up in the latest fashion, go for something that will still be doing well in years to come. People need to learn that the key is a balanced and diversified portfolio."

Sales of maxi individual savings accounts (ISAs) have slumped dramatically over the past couple of years as falling markets have put investors off equities. But for those who are still investing, any decision on what to buy should be based on their existing holdings. "You should review your portfolio and make sure any new investments complement what you've already got," says Anna Bowes, savings and investment manager at IFA Chase de Vere.

A spokes- woman for Fidelity Investments adds: "What's important is to look for gaps and areas where you're over- or underexposed and then base your decision on that."

It may be that a "must have" investment is suitable for you, but Michael Owen, director at IFA Plan Invest, says: "If you are thinking of 'following a fashion', try and find out why it's popular. Is it just a fad or are there fundamental reasons why people are investing in it?"

Corporate bond funds and equity income funds are popular now because they have performed well over the past few years, while most growth funds have fallen. However, this doesn't mean they should be avoided. If you don't already have exposure in these areas, there are strong arguments in their favour.

Corporate bonds are a good diversification from equities as bonds tend to do well when equities perform badly. Dividends are also strong at the moment, so equity income funds have been performing well in comparison with most growth funds.

The main point is to aim to build a structured portfolio, not just a mish-mash of different funds. Most importantly, you have to understand what you are investing in and the risks you are taking.

This is particularly important in the next few weeks. With the tax year ending on 5 April, investment houses will be marketing their top-performing funds heavily to encourage investors to use up their ISA allowance.

"The products in vogue are going to be the ones that have performed well, as investment houses are going to try and sell what they think there'll be demand for," says Chris Burvill, manager of Gartmore's Cautious Managed Fund. "But I'd encourage investors to go against that. [Unfortunately, while] we're bullish about the equity market, investors don't like the volatility or the fact we could be wrong, and they don't want to take the risk."

So if you're looking to invest before the end of the tax year, don't be swayed by the attractive marketing. Do some research. Evaluate what investments you already have and look for a fund that will fill any gaps in your portfolio.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive - OTE £40,000

    £15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

    Austen Lloyd: Law Costs HOD - Southampton

    £50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

    SThree: Recruitment Resourcer

    £20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Day In a Page

    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future
    How I outwitted the Gestapo

    How I outwitted the Gestapo

    My life as a Jew in wartime Berlin
    The nation's favourite animal revealed

    The nation's favourite animal revealed

    Women like cuddly creatures whilst men like creepy-crawlies
    Is this the way to get young people to vote?

    Getting young people to vote

    From #VOTESELFISH to Bite the Ballot
    Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

    Poldark star Heida Reed

    'I don't think a single bodice gets ripped'
    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Families clubbing together to build their own affordable accommodation

    Do It Yourself approach to securing a new house

    Community land trusts marking a new trend for taking the initiative away from developers
    Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

    David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

    The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
    With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

    Money, corruption and drugs

    The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
    America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

    150 years after it was outlawed...

    ... America's first slavery museum is established in Louisiana
    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
    Tony Oursler on exploring our uneasy relationship with technology with his new show

    You won't believe your eyes

    Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
    Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

    Moores must go. He should never have been brought back to fail again

    The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn