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CAN YOU TRUST “BEST BUY” LISTS?

In recent weeks, trust in “Best Buy” lists has been put increasingly under the microscope. 

While doubt over the value of these lists has been sparked by the link between prominent providers – such as Hargreaves Lansdown and SJP – and the ill-fated Woodford Equity Income fund (now suspended), it`s fair to say that a degree of scepticism has accompanied this practice for some time.

How frequently are the lists reviewed?  How transparent is the reviewer`s due diligence process – e.g. if a platform is receiving larger fees from an investment house, is this fact relevant to any one fund being included in its “Best Buy” list?

More to the point, is past performance a key reason that funds are being recommended?  If so, proceed with caution.  Many platforms justify their inclusion of funds in buy lists by reference to rolling five year performance figures.  The old adage that: “past performance is no guarantee of the future” is particularly valid here – try finding a fund that maintains top quartile performance for more than three years when you have a moment: that list is not exhaustive.

Alternatively, a platform might focus on those funds which are being bought more often than the rest: these so-called “hot” funds could well be the result of herd mentality and therefore be overbought.  In every other walk of life, savvy consumers wait for prices to fall before buying.

All this is not to say that “Best Buy” lists don`t have a place in an investor`s armoury.  We all need some reference point at a time when an estimated 9.2 million people in the UK think they could benefit from professional advice but feel it is beyond their price bracket (Source: Boring Money).  On top of this, 70% of DIY investors do employ “Best Buy” lists for one reason or another, so at the very least they can serve as a useful starting point.

The main message we want to convey is that any portfolio you are putting together should be carefully constructed, as well as diversified – not a result of picking investment funds in the same way as lottery numbers.

Follow a process: understand your attitude to risk and how much capacity you might have for loss.  Then, build an investment portfolio with assets that reflect your own particular circumstances.  You wouldn`t buy the first car or PC that was presented to you and, in the same way, it will pay you to think through your financial planning carefully, placing the selection of funds right at the end of that process.  In short, get a plan!

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