HAYSTACK Jar
TYPES OF HAYSTACKS
We have used Haystack as a metaphor for a basket of funds.
There are really two types of funds - actively managed funds and passive index funds.
Our preference has always been for the latter.
Active funds are in the news when they manage to secure a return that is well over what an index fund delivers. However, it is incredibly difficult to spot these funds in advance.
We should be careful about trying to predict which funds will do better than the average in the future.
WHAT TO LOOK OUT FOR
In an actively managed fund, the fund manager will try and beat an index which is their benchmark.
In doing so, they are sometimes forced to chop and change the contents of their portfolio rapidly. However, every change they make incurs a cost which then eats further into the returns.
Soon, these higher costs mean that the fund needs to generate even higher returns simply to stay above the waterline.
Also, there has been scandals in recent times where star fund managers have taken billions in AUM (Assets Under Management), millions of pounds in fees and then failed to deliver the promised performance - all to the detriment of the retail investor.
WHY IT IS CRITICAL TO CONTINUE INVESTING EVEN WHEN THE MARKETS ARE GOING RED?
It is absolutely essential to keep calm when the markets are dipping.
If possible, if you have a little bit of spare cash then you should put that into your investment account as you will buy more units with the same amount of money.
The key here is your attitude and temperament.
It is very true in investing that a calm demeanor is required to truly gain advantage in choppy financial markets.
HOW DOES THE MECHANICS WORK?
A simple illustration of how investments work is this:
Say your investment value is X pounds. Then,
£ X = U units x P price
where U = number of units bought and P is the current market price of that unit in pounds.
So, say you have invested £25 per month for the last six months and buying price for each unit every month was £1 then the number of units you own is U = X / P where X = £25 x 6 months & P = £1/unit.
Therefore number of units U= £150 / £1 = 150 units
Say the market jumps up due to some reason (say due to lower BoE base rate) and each unit is now worth £2, then the current value of your portfolio becomes 150 units x £2/unit = £300.
Your original investment of £150 has now grown to £300.
WHAT NEXT?
If you have decided on buying an index then this is the first major step in your investment lifecycle.
After a while compounding takes effect and you will see your investments grow.
Ensure that you set a mental marker of your investments reaching £100, £1000, £5000, £10000, £25000, £50000, £75000 and finally £100,000.
As you reach each of these milestones, the effects of time and compounding will help you propel your wealth even further.