Fool's Eye View

[ October 2, 2000 ]

Don't rely on luck when investing

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- People seem to be happy to rely on luck in many aspects of their lives. They buy a lottery ticket hoping that they will be lucky enough to win the jackpot. They rely on luck when choosing a financial advisor or a unit trust. They even rely on luck when investing in individual shares with their hard-earned savings.

Can you be lucky when investing in shares?

Many investors appear to have quite a cavalier attitude to investing. They are happy to take tips from many different sources. They rely on newspaper tips, friends of friends, tip sheets, or even on 'hot tips' from internet bulletin boards. But relying on others to find your investments for you simply means relying on luck. Many people wish me luck with my investing. But I think my investment performance has nothing whatsoever to do with luck. It is all down to hard work combined with constant reassessment of the performance of the companies that I am invested in and my own overall investment performance.

Now, a lot of people will realise that investing in shares is actually quite hard work, and needs a lot of research and constant monitoring, and they may feel that they don't have the time, ability or inclination to do this successfully, in which case they may decide that investing in a collective fund, a unit trust, would be the best place for their money. And they may decide that using an independent financial advisor (IFA), or financial sales people as we prefer to call them, is the best way for them to arrange this.

Can you be lucky and find the best IFA?

Now, as all regular readers of The Motley Fool know, we believe that people should take control of their own financial lives and not rely on so-called independent financial advisors. But despite this millions of people each year are happy to trust their money to IFAs. So how do people select which IFA to use?

I conducted some research among my friends. I admit that it was a limited study but it seems that most people do no research whatsoever when choosing an IFA. Many people find an IFA through word of mouth. Now that sounds a reasonable way to select an IFA. If someone has had a good experience and passes that information on, then maybe you too will have a good experience.

But most people are not recommended an IFA by their friends. Most people ask a professional such as a solicitor, estate agent, bank manager or accountant. Because these professionals have recommended the IFA they feel safe. What people do not realise is that these professionals are often paid a commission or a fee for passing people on to the IFA. Which IFA are they going to recommend to their clients? It's likely to be the one pays the highest fee or commission. So you have to be very lucky if you find the best financial advisor this way.

Will you be lucky and finding the best unit trust?

Once you have selected your financial advisor you will find that they recommend that you take out a unit trust. They won't recommend that you could invest in the stock market directly, or that you might buy an index tracker. But finding the best unit trust to invest in is again all down to luck. You will find that IFAs usually recommend funds that have had the best performance over time. Fools will know that past performance is most definitely not a good guide to future long term performance, and so usually you have to rely on being lucky and getting your funds invested in a fund that performs well in the future.

But you don't need to rely on luck!

Do you want to create a portfolio that will out perform 75% of all managed funds over the next ten years? If you do, don't rely on luck. And don't rely on an IFA being lucky and choosing a winning fund for you. Don't rely on other people giving you their latest hot tip either. But do work hard at your own investing methods and making your own decisions. Then you will find that you can beat most of the professional fund managers. But if you feel that you do not have the time, ability or inclination to make your own decisions then chose a fund that has been shown to beat 75% of managed funds over the long-term and put your money into an index tracker.

Where next?

• Past performance -- it's all bunk!
• Tracker funds are Foolishly simple
• Step 7 -- IFAs, Pensions and Endowments
• Step 8 -- Buying the market
• Index Trackers
• A tale of two fund manager's
• Index tracker discussion board