Am I being mad and stupid with this idea?

EdInvestor

lynzpower wrote: »

Say I had an investment in a company that sold say palm oil, then the international community outlawed the "farming " of palm oil due to environmental issues, then clearly the investment would go down the bog. Would a fund manager have the foresight and or ability to move my money ( and everyone elses) out of this company and into something else?

It depends on what sort of fund the investment is in. Let's say the palm oil company is one of 30 companies that the fund holds, and the other companies are in a wide variety of different sectors, but all with some connection to ethical investment.

The fund manager could switch out of companies exposed to palm oil and into companies focussing on clean water (say). Of course, even if the palm oil company went completely down the tubes (very rare) you would only lose one thirtieth of your investment (3.3%) in a diversified fund. You would hardly notice. The diversification has reduced the risk .

However, lets say that the fund holding the palm oil company was specifically mandated to invest in renewable energy and although it also holds 30 shares, they are all in much the same field.The ruling on farming palm oil would affect many of the shares held and investors would all sell their shares in similar companies.Your fund manager can't do that, as his fund is only allowed to invest in this sector.Result: you lose a lot of your money because he can't get out.(Under the rules a fund must be invested in what it says it will invest in: about 10% in cash is allowed, but that's about it.)

This is what happened with tech shares: the people who invested in tech funds lost out because the fund managers were not able to exit the sector. Whereas the people who invested in a diversified portfolio of different shares, only some of which were tech, suffered temporary losses but were soon back in the black as the prices of the non-tech shares rose when they came back into favour.

The same thing applies with country funds: it's riskier to invest in a fund which speciallises in say Thailand, than in one which invests in Asia Pacific emerging markets, because the second fund manager has plenty of other countries' stock markets to switch to if Thailand takes a hit, whereas the first one has no choice but to stay in Thai shares and go down with the market.

So the lesson here is that if you want to make a narrowly focussed investment like this, pay attention to what's happening to it, as it's you that needs to act if things start going wrong, not the fund manager.

That was a good question to ask.

Many people misunderstand this and get caught out.

lynzpower

Ed

thank you very much for your detailed and easy-to -grasp answer. it really is very much appreciated.

Plenty of food for thought there, will carry on looking into it.

thanks again.

dunstonh

Many people misunderstand this and get caught out.

And many of these are the type of people that many of us have come across. The type that swear they will never invest in the stockmarket again because they lost money.

What they really mean is that they didnt understand what they were investing in and picked funds above their risk rating and often putting 100% into that area. They blame the stockmarket where in reality they should blame themselves for poor quality investing.

nrsql

dunstonh wrote: »

And many of these are the type of people that many of us have come across. The type that swear they will never invest in the stockmarket again because they lost money.

What they really mean is that they didnt understand what they were investing in and picked funds above their risk rating and often putting 100% into that area. They blame the stockmarket where in reality they should blame themselves for poor quality investing.

Probably they invested at the peak after hearing about all the gains, invested a lump sum so they didn't keep missing out. The market then fell, they watched while it kept falling then when it was near the bottom cashed in so missing out on the recovery.

These are the people to watch - when they decide to invest again is probably the time to reduce holdings .

EdInvestor

nrsql wrote: »

Probably they invested at the peak after hearing about all the gains, invested a lump sum so they didn't keep missing out. The market then fell, they watched while it kept falling then when it was near the bottom cashed in so missing out on the recovery.

It is true that this approach ( Buy high, sell low) is common among inexperienced investors. It's a real pity, because it's quite obvious when you think about it, that shares are the same as anything else that you expect to appreciate in value over time,like houses or fine wine.

Ideally, you try to buy when prices are low, and sell when they are high.This is the basis of the "Value" style of investing in equities, which has shown the best returns over many decades.

Of course there can be a problem deciding whether the market and its listed companies are expensive or cheap.For instance at the moment, the stockmarket is at its highest level for 7 years - ie it has returned to the level it was at before it crashed at the start of the millenium.This has prompted some people to worry that it is due to crash again.

However, you can also look at this "bull run" (as some call it) simply as the market's recovery from the depths of the crash in 2003, rather than as a repeat of the "bubble" in the late 1990s. This second view is more likely IMHO because in the intervening years, companies have been growing, increasing earnings and repaying debt.

Thus, although their share prices have gone up, the key "P/E" ( price to earnings) ratio has come down compared with 1999. The P/E ratio has long been used to determine whether a share is good value for money.Many companies and the market itself were on P/E ratios of 30-40 at the time of the bubble, which was sky high. The market was very expensive.

Now the P/E ratios are in the 12-15 range, much more reasonable. Anything below 10 is seen as cheap, above 20 is expensive.So on that basis we are not in a bubble, and thus while the stockmarket will always be prone to intermittent wobbles of one kind or another, there is no reason for concern about a major crash of the type we saw 5 years ago. As long as you take a 5 year view of your investment ( so that the inevitable short-term wobbles are not a factor), there should be no real concern about buying in now.

In my opinion of course

EagerLearner

This is an excellent thread and I'd like to thank Lynz for asking and everyone else for providing such helpful and clear answers. I was feeling a bit overwhelmed by the information I have been trying to absorb, but nice to know other gals are also investing and it's not just a boys game and nice to read plain English...

Also Lynz I am in the same boat - my savings are in ISA's and also IceSave, and that's it. So a couple weeks ago I signed up with Hargreaves Lansdown and decided to start off risky like you, put £200 into a China fund, to see what it's all about. If this loses out, I will not be put off, but learn my lesson. I have also further invested £200 in global emerging markets, still risky but not as much as I have read China seems to be if that bubble bursts... I am now looking at UK smaller companies and UK equities, but to be honest it worries me that most of them seem to have falling figures at the mo so I am just going to hold tight right now.

Can anyone recommend either a good virtual site where I could 'play' with a portfolio for a month, or, an online trading game of some sort that will help me practice run? Many thanks :T

lynzpower

great to see you here Eager learner.

Maybe we could try to get our heads together over MSN or something sometime? ( I wont bank on you being able to provide a spreadsheet just yet

Ill be tryng to get my head round it in a few days bit overwhelmed meself at the mo.

debbie42

I track my portfolios on:
http://www.digitallook.com
and
http://www.moneyextra.com

Xbigman

Virtual portfolio's are meaningless. A million virtual pounds is nothing compared to £1000 of your cold hard cash on the line. I also don't think that solid investments are boring. OK, savings are boring because they are totally predictable. Shares are not predictable, even blue chips go up and down. If its just a bit of (mental) interest you want just buy some solid bluechip ftse100 shares in a range of companies and watch what happens. Jumping into some far east fund and wasting even a few hundred is pointless. Its just another few hundred your less exciting investments have to make up to get back to where you started from.

Try reading the Motley Fool investing boards, like the value and HYP boards. These offer good strategies for low and medium risk direct investing in the stockmarket.
Best of luck.



X

PS I follow the HYP strategy.

Browntrout_2

demonblade wrote: »

you might as well stick it all on Red and wait for the wheel to stop.

I cannot believe this advice, I am shocked..

Personally I would recommend putting it on Black, if it wins let it ride, if it loses make sure you've got your bus fare.
:beer:

Seriously though, you can run virtual portfolios to get the hang of it, but best way to invest is to pound cost averaging, i.e. you could start with a £500 lump sum then add £50 a month, stick with it through thick and thin, a lot of people try it out when everyone is talking about it, i.e. after a good run, then buy high and sell low and never return, sticking to safe building societies for a while until possibly being tempted in again at the top of next big run up...

Either DYOR or use an IFA.