Economy

You might be even worse off if your investments follow the herd.

Lists of popular investment funds, published by the country’s largest investment platforms, are powerful selling tools that many investors use to build their portfolios. But a study by The Mail on Sunday shows that investors who bought money from these lists a year ago would suffer heavy losses now.

Some of the favorite investments around this time last year were Scottish Mortgage (-49 percent); Baillie Gifford American (-52 percent); and Polar Capital Global Technology (-30 percent).

Investors who bought favorite stocks a year ago probably didn’t fare any better. Among the most popular stocks bought around this time last year were Boohoo (now down 77 percent); Asos (-75 percent); and The Hut Group (-61 percent).

Following the Herd: Lists of popular investment funds, published by the largest investment platforms, are powerful selling tools that many investors use to build their portfolios

To put these numbers in context, the FTSE All-Share Index is down less than 2 percent over the same period.

The major investment platforms – AJ Bell, Hargreaves Lansdown, Fidelity and Interactive Investor – publish a monthly list of the most popular investments purchased by clients.

These are different from the best-buy fund lists that platforms also compile based on their own investment research.

The popular fund lists are used by investors to get ideas and inspiration for their own portfolios. But experts warn that keeping an eye on them — worse, depending on them — could cost investors dearly.

Damien Fahy, founder of personal finance website MoneytotheMasses, says: “These lists of favorite funds are a marketing tactic that provides platforms with good PR and media coverage.

When markets are volatile and the future is unclear, I think a rear-view mirror doesn’t provide the comfort our brains derive from the feeling of being among the herd. In such circumstances I would ignore them.

Holly Mackay, BoringMoney

‘But ultimately they encourage customers to invest. It’s similar to the list of most bought items you see on a shopping website, like Amazon’s.’

He adds: ‘On the one hand, they can help generate investment ideas for investors who want to put money into the market. On the other hand, there are pitfalls due to the factors that affect the funds that appear on these lists.”

The Mail on Sunday looked at the most popular fund buys across the UK’s biggest investment platforms. If an investor had £500 spread across the top five funds on each platform a year ago, his original investment would now be worth £412 with AJ Bell; £443 with interactive investor; £433 with fidelity; and £468 with Hargreaves Lansdown.

Equity markets have fallen over this period, but some fund price falls have been dramatic.

Of the five most popular funds on the four platforms, only one is worth more than this time last year: Guinness Global Energy (up 49 percent).

Of the top-picked stocks, only three of the companies’ share prices have risen: BP (41 percent), HSBC (10 percent) and Rio Tinto (11 percent). The numbers are just a snapshot and there will inevitably be periods when the most popular funds outperform. Nor can performance be judged solely on the basis of results over a year. Nevertheless, it can take years to recoup a one-year decline of this magnitude.

Lists look back… not forward

Holly Mackay, from investment website BoringMoney, warns that the biggest problem with choosing to buy from bestseller lists is that investors make decisions about what to buy today based on what people have bought in the past.

She adds that investors tend to jump on bandwagon and invest in funds that are doing well. When the stock markets are steadily rising, such a strategy can work well. But not when markets deteriorate or during the volatile conditions we are seeing now.

Mackay says: ‘When the markets are steadily rising, these lists can help identify some good funds, as they are unlikely to change much from one month to the next.

Still, when markets are volatile and the future unclear, I think a rear-view mirror doesn’t provide the comfort our brains derive from the feeling of being among the herd. In such circumstances I would ignore them.’

Interestingly, there is little overlap between the most popular investments on the four largest platforms. This could be explained by the differences between the clients of each platform.

It can also indicate which funds each platform is promoting at what time. The choice of platform of funds to promote may not be the best for all individual investors.

In addition, you often buy at a premium

Investors have a habit of buying funds and companies that have grown recently and are therefore more expensive than in the past.

They are less likely to look for funds that are out of fashion and undervalued. Therefore, investors who decide to follow suit and buy last month’s top picks are likely to buy at higher prices. Mackay points to investment fund Scottish Mortgage. It was a much-loved pick last year, but is nowhere to be found on bestseller lists these days.

“Investors can pick up this confidence at a price that is 49 percent lower than a year ago,” she says. “So maybe this is a much better time to buy it.”

1669543855 11 If You Follow The Herd On Investments You Could Be

Heads turned by star managers

Fahy warns that star managers are often popular with investors. Fundsmith Equity, run by renowned fund manager Terry Smith, was the most popular fund choice on the AJ Bell, Fidelity and Interactive Investor platforms a year ago.

The fund is up 25 percent in three years, though it’s down 13 percent in the past 12 months. Sometimes following a popular manager can be profitable, but not always.

Says Fahy, “Don’t forget that Neil Woodford’s ill-fated Woodford Equity Income fund would have played a big part in these lists and some investors would have lost much of their savings when it was broken up.”

So, should you just ignore them?

DIY investors can access thousands of funds, mutual funds and stocks – all at the click of a button. This level of choice can be daunting even for the most confident and experienced, so it’s understandable that investors are looking for easy ways to narrow down their choices.

Bestseller lists are a resource for investors to turn to, in addition to lists issued by investment platforms with their own recommended funds.

Some platforms also publish suggested model portfolios of funds suitable for different types of investors. While all of these tools can provide ideas, there’s really no substitute for doing your own research to ensure you’re purchasing the best funds for you.

Jeremy Fawcett, founder of financial advisory firm Platform, suggests that using these tools together can work well.

“Fear-of-missing-out will drive some people to scan the lists of the most-bought funds,” he says. Options that stand out can be compared to best-buy lists to check how they are viewed by professional fund pickers.

“That’s not a terrible way to lessen the overwhelming choice that most amateur investors find a nightmare to deal with.”

Fahy adds that if you’re going to look at bestseller lists, you should at least look at those from a number of platforms, rather than sticking to your own lists.

Some links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us fund This Is Money and use it for free. We do not write articles to promote products. We do not allow any commercial relationship to compromise our editorial independence.

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