Most users of FundExpert.co.uk buy funds wholly invested into stock markets – so they tend not to buy bond funds or mixed funds.
There is a theory that fund managers cannot consistently perform better than the stock market indices. So if I buy a fund where the manager actively invests into the UK stock market, this theory suggests that he cannot consistently do better than the UK stock market index, which is the FTSE 100.
Stop obsessing over charges
So, the theory continues, you should just buy a fund which mirrors that index, a so-called index tracking fund, which requires no active input from the fund manager. The other reason to do this is because the charges are lower with index trackers (but I believe an obsession with charges is a danger to your wealth).
But does this theory stand up to scrutiny? No.
One of the very positive aspects of this theory (called efficient market hypothesis) is that it spawned a huge volume of research, much of it triggered because it seemed so instinctively incorrect (though was, and still is, believed by many).
The research relevant for you identifies the three ways in which you can consistently do better than the stock market index, rebutting the theory, and by a margin which can transform your investments.
- Momentum investing
- Small Cap investing
- Value Investing
Momentum investing simply means buying winners; in your case buying funds which are doing best now on the assumption that they will continue doing well.
Small cap investing is, obviously, buying smaller companies or funds which invest into smaller companies.
Value investing is a very different kettle of fish. It isn’t about simply buying what is cheap, as a company might have a low share price for very good reasons. Rather it is buying what is cheap without good reason. So rather than buying a winner (momentum investing) you are buying a certain type of loser
Take action
These exceptions are no theory – this is what actually happens. And it happens by generating huge extra profits for you.
