Back to school – top lessons for every investor

As the kids go back to school, they’ll be busy expanding brackets and mastering past participles. As adults, we’ve long since mastered algebra and rudimentary French, but there are a few lessons on investment markets that no one covered at school and it’s never too late to learn. 

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

Regular saving can be the easiest way to invest

This is an easy one, because saving regularly is the way most people invest anyway. Relatively few of us have great big lump sums to drop in the market, so we just tuck away a small amount each month to save for the long term.

It turns out that this can be a great way to invest. Investing regularly means that you’re not constantly thinking about whether it’s the right time to invest, where it should go, or what’s happening in the market. Regular savings helps mitigate 'market risk' — i.e. investing at the top of the market, or selling out at the bottom. Saving in regular chunks, rather than all in one go, varies the price at which investments are bought and can help to reduce the risk of investing when the market is high.

Being in the market is the most important decision you can make

Whilst we would always advocate trying to find the best investment possible, the real magic comes from just being in the market. In the end, the most important thing is letting it do its work over time. The long-term return from the MSCI World index is around 8.6% per year (in USD, since 13 December 1987)*. There have been highs and lows in between, but since 2010, the market has been down in four calendar years, and up in 10*.

The power of that growth, compounded over time, is extraordinary. If you had invested £250 every month in the market since 1987, you would now be sitting on a pot of £863,000 (based on the performance of the MSCI World). If you’d stuck it all in a cash account paying 4%, you’d have just £254,000.

Rebalance (quite) regularly

We wouldn’t suggest that you constantly check your investments, but it is worth ensuring that they remain right for you. A portfolio can become unbalanced for a number of reasons. A certain sector may have done particularly well, which means it becomes a disproportionate weighting in a portfolio. Or your circumstances may have changed, which means your holdings are too risky for your risk tolerance.

A sector that highlights this, is the technology sector. It has been such a strong performer for such a long time that it has become a larger share of the main indices (around a third of the S&P 500) and many investors’ portfolios. This can leave them with unintended risks. Rebalancing helps ensure you stay within your target weightings.

Every good fund manager will have the strength to sell their cherished holdings when they become too expensive and look for opportunities among cheaper stocks. Chris Ford, fund manager on the Sanlam Global Artificial intelligence fund, says: “Every now and again, things get too expensive and equally, every now and again, things get too cheap and they provide the opportunities for taking positions in respect of the stocks in question.”

There is a difference between a good company and a good investment

In its recent results, Nvidia delivered revenue growth of 122%, yet its share price has been very unsettled ever since. There is no doubt that Nvidia is a great company, tapped into the AI trend, but if expectations for its future growth are too high, it won’t make a great investment from here.
This is an important lesson for investors. Expensive stocks, with lots of excitement around their prospects, may be poor investments even if the company itself continues to grow well. Chris says: “There are parts of the market, particularly on the AI infrastructure side, where the stocks have just done really well and there’s a lot baked in. We need to be careful about that.”

Master your behaviour

Humans aren’t naturally great at investment decision-making. We tend to like to run with the herd, which means we invest when everyone is very excited about things, and sell out when everyone is at their most gloomy. This can lead to selling at the bottom and buying at the top, the very opposite of a good investment strategy.

It can also happen with investment funds. We pick an investment fund in good faith, but then it has a run of difficult performance, we sell and buy into something that’s had a better run. Usually, this happens just as the ‘bad’ fund is about to hit a good patch and the ‘good’ fund is about to have a difficult moment. This is terribly corrosive for your long-term wealth.

Schroder Income, for example, had a tough run of performance from early 2020 to mid-2021, but has now significantly outpaced its sector for three years**. If investors had swapped out, disillusioned, in 2021, they’d have missed out on that top quartile performance.

The best way to curb these instincts is to be aware of them. Think hard before switching funds after a period of weakness, and ask yourself whether a fund manager has really gone bad, or whether it’s just that their style has been out of favour.

That’s the end of today’s lesson: much shorter than usual, a lot easier than trigonometry and no homework at the end.

*Source: MSCI index factsheet, 30 August 2024

**Source: FEfundinfo, 24 September 2019 to 24 September 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.