Episode 27: Moving Abroad - the process, the challenges, the joys with Tom Pewtress, Peter Gollogly, Bryan Bann & Jonathan Lumb
Facebook, Apple, Amazon, Netflix, Google. Companies many of us use in our everyday lives and which have all taken the stock market by storm in recent years. The shares of these giant US companies, collectively known as the FAANG stocks, make up a big portion of many investors’ portfolios. Their current valuations suggest the market expects plenty more growth to come. So it might come as a surprise to some that we don’t invest in them.
Investing directly in shares, FAANGs or otherwise, means you might be placing a significant portion of your wealth in a small number of companies. If you know them inside-out, are confident of their future prospects and have the time, knowledge and energy to monitor them, this could deliver a good outcome. If on the other hand things don’t go as planned for even one or two, given how much you’ve invested in them, that could put a big dent in your portfolio. This is known as concentration risk.
One of the best ways to overcome concentration risk is to invest in funds. A fund is a collection of shares, bonds or other types of assets. They typically contain anywhere from 25-250 investments, and can even have several thousand in some index-tracking funds. With a large number of holdings you spread the risk, so you’re not putting all your eggs in one basket.
Invest in several funds and you’ve got yourself the makings of a well-diversified portfolio. Diversification is where your portfolio has exposure to lots of different areas, so that could include different types of asset classes such as shares and bonds, different regions such as North America, Europe and Asia and different sectors such as technology, healthcare and financial services.
There are no guarantees in investing. Any area could be among tomorrow’s winners or losers, but by diversifying across the lot you’ll always have exposure to whatever is doing well and not too much exposure to whatever is struggling. That’s why diversification is said to be the only free lunch in investing.
Because our portfolios are a well-diversified blend of funds, they do actually invest in the FAANGs, as well as thousands of other companies, just indirectly. Bearing in mind the FAANGs are among the biggest companies on the global stock market, naturally they’ll also feature more heavily than other companies. To put it into perspective, with a global index-tracker fund for example, you’ll invest more in just those five FAANG stocks than the entire UK, French and German stock markets combined. For us that’s plenty.
Another reason we don’t invest directly in FAANG stocks or any other companies is, as the saying goes, “you can’t beat the street”. This refers to the difficulty of trying to outsmart Wall Street analysts or other teams of professional investors. Some wealth managers, as well as ordinary investors, do make their own investments in individual stocks. We believe, however, it’s best left to fund managers. Many of them have decades of experience behind them, are supported by large teams of skilled analysts and can dedicate all of their working hours to analysing companies.
We believe in playing to your strengths. So we think it’s sensible to leave the stock-picking to professional stock-pickers. While companies like the FAANGs have undoubtedly delivered excellent returns for many years, there’s no guarantee they, nor any other top-performing stock, will keep doing so in the future. That’s not to say we don’t think they will. We’re simply saying we’ll let the pros decide.
Our job is then to find those fund managers we think are among the best in the business. That’s why every fund in our portfolios has been thoroughly researched. This includes meetings with the fund team to better understand the philosophy, process, resources and culture better than any factsheet or fund screener ever could. It’s all with the aim to create the strongest portfolios we can to help you achieve your long-term financial goals.
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