When’s the right time to change your mind?

Graham Smith

Graham Smith - Market Commentator

Judd Trump’s breathtaking exhibition of skill and talent at last weekend’s World Snooker Championship final – in which he doubled the frames tally of a seemingly unstoppable opponent in four-times winner John Higgins – came as a fine example of what an outstanding natural ability combined with unflinching hard work over a number of years can achieve.

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So it is in the investment world too. Longstanding, successful fund managers tend to exhibit aptitude with a propensity for persistent hard work. However, we should not underestimate adaptability as a third useful ingredient.

Some of the greatest investors have altered their own investing rules over time, although they, themselves, might not put it that way. Even Warren Buffett, a disciple of the greatest value investor of them all – Benjamin Graham – on occasion skips over to the dark side of technology and growth.

Buffett famously added Apple to Berkshire Hathaway’s portfolio in 2016, hardly a stock for the value minded purists¹. At a pinch you could call on the argument that growth ultimately creates value over time, but it would be some pinch and your definition of value would have to be flexible.

In a similar vein, arguably the UK’s most successful equity income manager – Neil Woodford – has also extended his scope in recent years. Famed for an outstanding long term record borne of holding investments in large, defensive, value oriented companies, Woodford has more recently ventured into unquoted growth companies too².

This begs the question should individual investors employ such similar flexibility? In other words, have the strategies we have followed in the past delivered the kind of results we were looking for and, if not, should we be thinking about changing them?

In some ways, the recent past has proven quite a test. Sharp market falls late last year followed by a strong rebound in the first quarter of 2019 highlight a potential problem in switching course.

Our psychologies dictate that investing today – now that markets have stabilised and risen – is an easier thing to do than it would have been at the end of last year, when the world was apparently wilting under a deathly cocktail of insoluble economic difficulties.

In retrospect, it would have been better to have taken the severe disquiet in markets at the end of an awful year as a cue to invest more, not a reason to reduce riskier exposures.

This week, markets introduced a new potential headache for investors with short term time horizons – talk of the possibility trade discussions between the US and China might be close to breaking down.

Fears the US may be close to marking that event with another round of punitive tariffs on Chinese goods have caused some of the market’s recent winners to move into retreat³.

For most investors, sticking with just one strategy – say, investing mainly in growth stocks or mainly value stocks – is too much of a risk to take. That could be because the strategy ends up being just plain wrong, or because an investor’s wealth or outgoings change over time demanding a fresh approach.

Against that, the conventional wisdom is to formulate a strategy to meet your financial goals over time then stick with it. For equities, that means accepting there will be twists and turns along the way and staying invested to eventually benefit from rising prices over time.

These are all good thoughts, but how do we combine them to formulate a successful approach?

The obvious answer is to have a strategy that depends not solely on one investing style or another then stick with that for the long run. Investment funds give us a head start. They give us access to experienced fund managers with varying investment styles.

By investing in a combination of trusted funds, we can buy into success while never committing all our eggs to one basket. This approach will not create the miracle of short term success promised by individual share selections, but neither is it anywhere near as likely to result in fast, damaging losses.

Fidelity’s Select 50 list of favourite funds contains ideas for investors seeking a variety of investing styles. Looking globally, we find the Rathbone Global Opportunities Fund and the Fidelity Global Dividend Fund offering diverse and potentially complimentary approaches.

The former ranks sustainable growth and earnings upgrades as highly important drivers of returns and arrives at a portfolio of around 60 companies currently dominated by some of America’s largest technology businesses – you’ll find Amazon, Adobe, PayPal, Mastercard and Visa among others here.

On the other hand, Fidelity’s fund targets companies offering a margin of safety by virtue of their strong balance sheets, predictable cash flows and track records of allocating capital to the right things. In doing so, it aims to identify and invest in companies able to deliver growing dividends over time. Pharmaceuticals, consumer staples and utilities are currently in strong evidence here.

More on Rathbone Global Opportunities Fund

More on Fidelity Global Dividend Fund

Source:
¹ CNBC, 16.05.16
² Woodford Investment Management, 01.03.19
³ South China Morning Post, 08.05.19

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.