Lessons to learn from Woodford meltdown
NEIL Woodford’s fall from grace, which has seen his empire crumble and his customers suffer heavy losses, has shaken many investors to their core.
Though there will be little comfort for savers who have lost out from the fund manager’s downfall, there are lessons to be learned from the debacle.
Investing will always carry some risk, but not investing at all will almost certainly involve missing out on gains in the long term. And there are ways to minimise risk and protect the value of your investment.
With that in mind, Woodford ( pictured) has taught savers several key lessons:
DON’T PUT ALL YOUR EGGS IN ONE BASKET
Investors who ploughed their entire life savings into Woodford funds have learned the hard way.
Spreading your risk is essential. Funds which spread the investment across many stocks and other assets are a good way to start.
But even then, investors should ensure their money is split across different managers and areas.
TAKE CARE OF YOUR DEBTS BEFORE YOU INVEST
Don’t start chasing gains on the stock market before paying off debts. Investments can go down as well as up. So hoping to turn a small pot of cash into a large pot of cash to pay off looming debts could backfire spectacularly.
KEEP CASH FOR EMERGENCIES
Holding cash in the bank, even at low interest rates, is useful to cover emergencies such as car repairs, or for looming expenses such as a wedding or holiday.
DO SOME RESEARCH AND KEEP WATCHING
Find out what the fund manager invests in. Only hand over your money if that’s what you want to invest in. Just checking at the beginning isn’t enough.
Jason Hollands, of wealth manager Tilney, says: ‘A big concern is when a manager deviates from their previous approach and recipe for past success. ‘ They are effectively experimenting with investors’ money. This can be a sign of either loss of faith in their process or over confidence in their abilities.’
Many have criticised Woodford for his deviation, as he began to plough more of the Equity Income fund into smaller, riskier stocks.
BEWARE BEST-BUY LISTS
Most investment platforms will publish a list of recommended funds. Andy Bell, founder of AJ Bell, says they are ‘really important for investors who can’t afford a wealth manager or independent advice’.
But Hargreaves Lansdown came under fire for keeping Woodford Equity Income on its Wealth 50 list right until it was suspended in June.
Investors should check how platforms research the funds on their lists, and ensure that the recommendations aren’t linked to any economic incentives for the firm.
CHECK OUT THE FUND MANAGER
Although past performance is never an indication of future reliability, checking a manager’s track record can give an idea of how successful they have been.
Their performance will always fluctuate as their strategy falls in and out of favour, but websites like FE Trustnet and Morningstar will show their performance against the industry benchmark over time.
Woodford’s track record was stellar before he set up his own firm in 2014, which proves past performance isn’t everything. So keep up with news about the fund manager.
Rather than trusting one big name, Haig Bathgate, of 7IM, says: ‘We favour investing in funds where there is a strong team approach with different talents working together to make investment decisions.
Multiple points of view can provide multiple ways to solve problems that one person would not have been able to.’
CONSIDER TRACKER FUNDS FOR PART OF YOUR PORTFOLIO
As the name suggests, they track an index such as the FTSE 100 or FTSE 350. This means they will go down when the market does, but you won’t run the risk of significantly underperforming. They are generally cheaper than funds run by a big- name stockpicker. Firms such as Vanguard and Fidelity offer a range of different trackers.
DON’T GET CAUGHT UP IN THE HYPE OF A NEW LAUNCH
It’s easy to get carried away when a well-known manager sets up a fund.
In the run-up to the launch of Woodford Equity Income fund, Hargreaves Lansdown sent customers four emails persuading them to invest.
But platforms and wealth advisers may get economic incentives from a fund manager for pulling in more of their customers’ money, so be wary.
CONSIDER REGULAR INVESTMENT
If you’re worried about investing a lump of money and then immediately seeing the market fall, invest a little at a time. This reduces the risk of piling in at a bad time.
. . . AND KEEP INVESTING
One of the biggest downsides of the Woodford debacle is that it will deter many from investing.
Yes, it’s a risk, but if you just keep your money in a deposit account you are certain to lose in real terms after inflation because returns are so low.