How we make sure your funds aren’t in the dog house

We’re all scrabbling to preserve the value of our money, especially currently, as we live with the uncertainty of market volatility and inflation. 

In situations like this, investing is much better than saving. There isn’t a savings account in this country that can grow your money ahead of inflation, currently at 5.5%, and expected to hit 7.5% in April.

A better option is to put your money into funds

Historically, funds investments have been shown to far outperform savings accounts, provided you take a long-term view.

However, it’s essential to take advice from a professional expert (that’s us!) in choosing which funds to use. Within that, our independence is important, because we’re not obliged to direct you towards a particular fund. Independent advisers are free to take a ‘whole-of-market’ approach, which means we can find the best deal for you.

This is important, because many funds go through a bad patch – they can underperform, failing to meet their benchmark performance, and if your money is in one of these funds, it’s missing out on the growth it could have had in a better-performing fund.

How do you know if your funds are underperforming?

Well, each year financial services company Bestinvest produces a report called Spot the Dog, which identifies badly performing funds aka ‘dog funds’ and highlights best-of-breed alternatives. 

To be classed as a ‘dog’ the fund needs to have delivered worse returns than the market it invests in for three consecutive 12-month periods.

To give you an idea as to how much fund performance can vary, a good fund can improve investments over five years by 65.8%, while at over the same period a ‘dog’ fund can lose over 9%*. 

How do we use this research? Our network’s investment committee regularly monitors our fund selection to ensure nothing in the Spot the Dog list is there. It’s not just about performance though. The current lowest dog fund happens also to be quite expensive to run – the annual management charge is 1.3% – there’s not a single fund on our panel that costs that much.

This perspective is essential. We’re not aiming for the best (or worst!) - the key to growing your money is to know which funds have been successful in the long term and which ones represent good value overall. Consistency is what matters.

There have been examples in the past of ‘superstar’ fund managers who make their reputation with one brilliant fund, but their luck runs out and the following fund that they open does not do well. This is not our approach.

A long-term view

Of course, it’s not just a case of picking the right funds. There are probably the four great tenets of funds investing: start early, stick with it for the long term, invest steadily, and do it with advice. It’s not flashy, but it works.

If you are looking to save over 20, 30 or 40 years, then the ups and downs of the stock market will be less of a worry for you. They’ll even each other out, and help you achieve investment growth. 

But remember the key: it’s better with expert advice. 

We can help you to keep focused on the journey head, so that you reach your financial goals – whatever they may be – and helping you to avoid the ‘paw’ performers and bad mutts of the fund management industry along the way.

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Financial zoo glossary of terms 

You may think we’re animal mad after January’s post on ‘eating the frog’ and this one. But it’s hard to avoid animal terms in finance – dog funds are just the start! Here are some other common ones – and hopefully some helpful explanations.

Bulls and bears: these market terms relate to the way each animal attacks. A bull market is going up – as in the direction its horns point on attack. A bear market is going down because bears attack by drawing their paws downwards.

Doves and hawks: A ‘dovish’ tone means central bankers are pessimistic about economic growth prospects whereas ‘hawkish’ bankers are generally optimistic.

Ostriches The ‘ostrich effect’ is used to describe investors who tend to ignore tumbling stock markets or tough financial situations. They'd much rather stick their heads in the sand, than look at their portfolio. We help clients resist this temptation!

Lemming investors: On the other hand we have lemming investors - people who invest without advice. The financial equivalent of jumping off a cliff and hoping for the best!

Hamsterkauf: A German term referring to a hamster on a wheel, rapidly panic buying or investing uncontrollably – a sure recipe for disaster (and another reason to talk to us!).

Wolf warrior: A fund manager who defends their actions despite the obvious evidence that everything is going pear-shaped. We know them and we avoid them!

Dead cat bounce: This is where a particular stock which has been in decline has a temporary recovery before continuing its decline.

Have we missed any? Let us know!

*This is based on data from Financial Express on the Investment Association’s Mixed Investment 40-85% Shares sector, as at 3 March 2022.