The first step into the stock market from being a cash investor, safe in bank deposits but earning minimal rates (the current best 2-year fixed-term bond pays just 1.85%, and top-paying cash Isas yield around 1.5%), can be a daunting one.
Suddenly you’re facing not just the prospect of greater risk but a vast choice – funds and trusts from many different managers investing in different sizes of company and different regions or countries, with different investment aims. Maybe it’s just less hassle to stick with cash?
Well, says Aberdeen Asset Management in its latest posting on the Market Views site, if you do you’ll be losing out substantially over the long term. Not only do equities tend to provide better long-term returns, but they also give protection from inflation in a way that cash cannot; and many funds pay a dividend income as well, helping to boost total returns. And you get those benefits just from being in the market, without any fancy stock-picking.
The secret, Aberdeen argues, is to keep it simple: ‘Certainly, it may have been possible to make higher returns by investing in, say, smaller companies, or the right emerging market, but this is often difficult to predict and investors can achieve a lot of the good aspects of stock market investment without introducing that level of nuance.’
Most newcomers to the market are likely to feel more comfortable with an investment focused on their own economy. But rather than trying to pick the ‘best’ active manager, there’s a good argument for using a cheap, broad-based UK tracker such as the Aberdeen FTSE All-Share investment trust – especially if you’re reinvesting your dividends.
Such a fund could work well as a core holding onto which you could tack more focused, regional or global funds in due course. While you could build a whole portfolio of trackers, many investors like to mix and match for a bit more punch in their portfolio.
And that is where the manager’s focus and philosophy becomes such an important consideration in fund or trust selection. A stock-picker to the core, Baillie Gifford’s James Anderson makes the investment case that there’s much more to be gained by ignoring the wider market and concentrating specifically on the companies best placed to transform the way we live for the better.
‘Looking to the future, there is much rational excitement to be found in the technological revolutions underway in transportation, alternative energy and healthcare,’ he says.
To that end, Anderson and his colleagues are on the hunt for ‘superb companies’ in such sectors, ‘selling at valuations that do not reflect their future prospects’. ‘Nothing else really matters to us,’ he adds.
The bottom line is that every investor has to dip a first toe into the murky waters of the stock market – and at that point the low cost, diversification and simple message of a broad index tracker have a lot going for them.
But over time it makes sense to branch out into other markets, managers and methods – such diversification, after all, is a core principle helping to reduce overall risk to your portfolio. And at that point, there is much to be said for tapping into the focused expertise of a highly regarded ‘manager with a mission’.
