Investment Companies.
Which investment companies should you choose? I assume you've decided you can't do your own investing; it seems a bit complicated, you don't like to gamble, you'd like someone more knowledgeable to bear the burden.
This could be a mistake. Investment companies charge a percentage of the profits _and_ a percentage of the principal too. When times are lean, you might earn more by putting your money in a high interest savings account. Fund managers are not gods; most don't out-perform the market i.e. put your money in an index tracker, and you'll do better than most of those sharp-suited young men.
If you must, consider the following: - How old is the company?
- Have there been changes in senior personnel recently?
- Has a superstar left, or joined recently?
- Do you read about them in the business papers, and for what reasons?
- Do you read about them in the tabloids, and for what reasons?
- Did a friend recommend them?
- Would you trust your life's savings on your friend's judgement?
All top investment companies have one or two great fund managers; people who really have a feel for the game, a cool head, and objectivity. Theirs are the funds to get into. The other funds these investment companies tout are not to be bothered with.
Investment styles go in and out of fashion. Here are the main investment styles:
Growth
Growth investors look for companies with great projected earnings growth supported by a solid history of earnings improvement.
Value
Value investors take the contrarian approach, scouring the screens, analyst reports and company accounts for shares that are cheaper than ‘fair value’.
Income
Income investors look for shares paying high, secure dividends. This is a long-term, low-risk style; a variation – the growth and income strategy – demands a moderate earnings growth rate, translated into growing dividends.
Growth at a reasonable price (GARP)
This approach combines features of growth and value investing: the key ratio is the price to earnings per share growth ratio (called the PEG ratio).
Fundamental
Companies with strong balance sheets and undervalued assets: especially low price-to-book ratios (less than 1), strong cash flow and low debt.
Capitalisation
The size of a company as measured by market capitalisation – large, mid, small, micro – goes in and out of favour with investors, depending on market conditions.
Momentum
Momentum is buying fastest-moving shares (in the fastest-moving sector) in the belief that they will continue to soar.
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