'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.