How we Choose Investment Funds – part 1

By Huw Jones

Good Planning,When introducing evidence-based investing, we like to begin by explaining why we feel it’s the right investment strategy for those who are seeking to build or preserve their wealth in, often, wild and woolly markets.

Of course sensible strategy is best followed by practical implementation, so it’s also worth describing how we choose investment funds that we typically use in our clients’ portfolios.  We split this process into three parts:

Part 1: Speculative v Evidence-Based Strategy

Our selection process is like a highly personalised, straight knockout tournament – like Wimbledon or the FA Cup (but without tie breaks, extra time or replays).

We still consider a huge range of investment funds: thousands of possible contenders. But it’s relatively easy to eliminate the vast majority of them in part 1, with only the strongest surviving as viable candidates.

In the first round, we want to eliminate speculative fund managers who are playing an entirely different game from what we have in mind.

Speculative: Speculative strategists try to forecast the upcoming performance of securities, sectors or markets and trade accordingly. Individuals may do this by gazing at funds’ “star” ratings or acting on seemingly hot tips from any number of sources.

Fund managers may hire well-paid analysts to probe the universe for secrets about to unfold, and issue buy, sell or hold recommendations accordingly. Either way, these are not exercises that are expected to beat the market, especially after the costs involved in trying.

Evidence-Based: Instead, you and your fund manager can simply hold the universe and be part of its expected expansion.

Speculative fund managers may be working very hard at what they’re doing, but it’s an exercise that is more likely to detract from than benefit your goals of building and preserving durable wealth in volatile markets.

By eliminating those who are engaging in speculative tactics from our recommended playlist, we can readily knock out a wide swath of would-be fund selections in the opening round.