‘Be greedy when others are fearful’.
There can’t be many investors who don’t know that famous Warren Buffett quote, but the proportion that pay heed to it when the bad times come knocking is probably fairly low.
For some time I’ve said that the next time markets fell 30 per cent, I’d be buying as much as I could.
This was on the basis that while the stock market can continue to fall considerably beyond that, such a drop is usually followed sometime later by a strong bounce back.
My magic 30 per cent number was hit in March, but did I pile in? No, I was circumspect while others were fearful instead of greedy.
I stuck a chunk of cash into my Sipp and Isa around the new tax year, but missed the chance to really make hay while the sun shone on stock markets in lockdown.
I wonder whether some of those newer to investing did make some hefty profits, however.
As markets collapsed in early March, we had a number of questions from people saying they wanted to profit from the crash and buy in while shares were cheap.
That’s not a bad idea in theory, but when you’re staring down the barrel of an unprecedented number of situations being described as unprecedented, you do feel the urge to warn people to play it cautious.
So, it was not without some trepidation that we published an article on 17 March headlined: Think the stock market will bounce back from the coronavirus panic? Here’s how to take advantage
It included a large health warning: ‘What investors must steel themselves for is more potential falls before any gains.’
The good news is that while they will have had some nervy days, anyone who did invest back then didn’t have to steel themselves for too much pain, yet.
The stock market’s rebound from a brutally hard and fast crash has been equally astonishing. The FTSE 100 is up 27 per cent from its 23 March recent low, but America’s S&P 500 has rocketed 43 per cent.
Whether markets slump again or not – and they certainly could – this illustrates the benefits for British investors of not just investing in our home stock market.
Instead, the basic building block of any stock market investment portfolio should be a fund or trust that invests as broadly as possible. One that lets you own the world.
This disadvantage of this is that they can leave you very heavily exposed to the US, which is the world’s biggest stock market, and many would argue is over-valued.
On the flipside, the advantage probably doesn’t need spelling out in light of the figures above.
However, even if you do think that the US market is too pricey and would prefer not to back it quite so heavily, you can either choose a global fund that holds less in America, or add a couple of other funds and trusts that invest elsewhere to rein your exposure in.
Investors in some of the big names in the world of global funds and investment trusts are likely to have been pleased with their returns over the past couple of months.
To varying degrees, dependent on their individual strategy and holdings, the likes of Fundsmith Equity, Lindsell Train Global Equity, Scottish Mortgage, Baillie Gifford Global Discovery, have reaped handsome profits from the rebound.
Some of the money I invested in my Sipp went into the up-and-coming Blue Whale Growth Fund in the middle of April and is up a bumper 20 per cent.
But before you sign up to one of those big global fund or trust beasts, you should also ask yourself if a cheap and simple tracker can do the job equally well.
Funds can be divided into two categories active and passive. The former has a manager who attempts to pick winning shares and beat the market, whereas the latter will simply replicate a given stock market or index’s performance.
It’s easy to think that investing with a manager who can beat the market is the obvious choice, but there’s an important caveat: often those fund managers fall short.
By trying to pick winners they risk getting things wrong and falling behind the market instead of racing ahead of it.
The way to avoid this trap is to choose a passive or tracker fund. At their simplest level these follow a major stock market index or basket of investments and aim to track its performance as closely as possible.
A tracker won’t beat the market, but nor will a decent one fall substantially behind.
The two things to watch out for with passive funds are tracking error and costs. Tracking error is a guide to how closely that fund manages to follow its benchmark index, while high costs will eat into your returns.
A good building block is a global tracker, for example HSBC’s FTSE All-World Index fund, or Fidelity’s Index World fund. These let you invest around the world at a knockdown price.
It is also possible to buy a tracker fund that builds an entire balanced portfolio in one place and invests in shares and bonds around the world, the most popular is Vanguard’s LifeStrategy range, which holds varying degrees of these assets depending on how much risk you would like to take.
Active funds or trusts that do similar are also available, ranging from defensive trusts such as Ruffer and Personal Assets, to more growth-oriented options such as Baillie Gifford’s Managed Fund.
Whether you are an experienced or novice investor the gains markets have seen in the past couple of months offer some breathing space to check whether your portfolio is right for you.
For a crash course in building a balanced portfolio, read our guide to asset allocation here, and whatever you opt to do, remember there’s every chance the market may take another tumble.
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