Choosing Funds, Part 2 - BOD035

0:00If you're trying to compare UK equity versus Vietnamese small companies. Which I often am. Indeed. Me too. All the time. I am so invested in the Vietnamese market small companies. Honestly, sometimes it's all I can think of. Just off topic, this guy had the capacity to think that through with his mind. Hi and welcome to the Bank of Dad podcast. I'm Kate and this is my dad Pete. Hello. And we're here to teach you the money lessons we were never taught at school. there's no judgement no jargon just real talk about how to handle your money couldn't be bothered getting changed no really couldn't we cut the last episode short because we were 40 minutes in and we're only halfway through the kind of notes and so we thought we'll make it into a two parter and thus we can stay in the same outfit well yes because we normally you know we'll shoot two or three in a row you know production values and all that we'll change our shirts don't say we don't think about you exactly that's the amount of effort we put into this we bring in multiple shirts leaving the door this morning.

1:01I was like, have you got multiple shirts? Like, nope, good shout. Now we're not even using them. After all that. Do you know what? There's an update I realised that we didn't tell them last week. About? We all know that you had quite the rough reaction during your Rush concert. Yeah, so we talked about obviously the fact that I was going to Toronto to see, you know, my first love band, Canadian prog rock band called Rush and I've loved them since I was 16 and this was kind of a you know, nice bonding trip, me and my big brother he got me into them originally we booked it the week after mum died last year, so we've been sort of waiting for this for 10 months and at the time of booking you didn't know that there was going to be a UK tour so you thought sod it, let's do a we're just going to go 72 hour blast to Toronto see this band, you know, they're a Toronto band so we were going on the last night of their homecoming gigs Yeah, it was going to be wicked.

1:59It was going to be epic. And it was. The gig was epic. Unfortunately, I spent most of it trying not to throw up and shit myself. Because poor dad had food poisoning. I had food poisoning. It was very unpleasant. So I wasn't as present as I would otherwise have been. So dad came. I mean, obviously there was a time difference. So we woke up and mum told us that dad had had this. Oh, for the love of God. It was just the worst thing. And so I was immediately like, hmm, I wonder what we can do about that. and then you kept telling people because everyone kept going, hey Pete man, how was Rush? Yeah.

2:31And then you had to tell the story and I think it was on like the 17th time that I heard it. I was like, right. I've got to do something about this. So it was about three days after you came back I went to my sister and I was like, right. Do you want to look at the UK tour dates for dad? To cut a long story short, sound like my gran. We booked dad in secret tickets to go and see Rush in March of 2027 in Manchester with his brother. Yes. with my uncle to sort of like a redo. We thought that's going to be the best freaking Christmas present ever. Yeah. Go us. Absolutely is the best Christmas present ever.

3:04And then we've had to tell him. Yeah, yeah. So it's September now and I already know what my Christmas present is going to be because... Dad kept threatening to book tickets himself. So he didn't know obviously that we were doing this, but like he clocked. There was a specific financial advice-y kind of conference going on in London on the same day as one of the London dates for Rush. and he was like, I could use that as an excuse to go. Exactly. And he's there showing me on holiday. Expense the train and the hotel. Literally, on the holiday, he's showing me like, I could go to this conference, Kate, and I'm going, dear God.

3:34Yeah, we bought you tickets to Manchester. I'm like, how do I do that? And we're like, hi. But the whole office, no, because I've got them in on it so that we could block your diary. Like everybody, and then you keep going, maybe I'll just get dates for London and they're all going. And it just keeps, I thought you'd, I thought you'd might have let it go. But no, I was a bit dog with a bone. I'm going to do this. I just need to make up for it. I'll go. I'm just going to go. I'll see if Johnny wants to go. Anyway, it's all done. I had to call my sister and say, are you all right for me to tell him?

4:01So we had to tell him this week. Super excited though. Yeah. It's best Christmas for Rosie ever. And honestly, I mean, it was so disappointing to go all that way and be so poorly, you know. And, you know, it was like, felt like a massive anticlimax really. And that was coming off the back of, I only decided really two days before we went that I would go because mum had been so poorly. which I think we mentioned. Yeah, yeah. So it's just like, right, okay, we're going to be okay. We're on the up. I'm going to go to Toronto. I had a brilliant day and an hour and a half before the gig I started throwing up big time.

4:34So, putting him on a diet of Pringles. Yeah, I can eat nothing which isn't just like packaged. Oh, crisps, basically. I eat crisps for 72 hours before the gig. I think just eat Pringles before the gig and you'll be fine. I'll be fine. Can't get food poisoning from that, surely. Oh, dear God, touch God. Okay, into that. Let's get into it. So this week we were continuing our episode that we started last week on choosing funds because it turned out I really needed to keep grilling Dad to get any form of understanding. It's good though. It's good a lot of ground. Yeah we did so we're doing part two.

5:04So let's do another Wanky Word of the Week. It's time for Wanky Word of the Week. It's time for Wanky Word of the Week. What a tune. Right. Now this one you put in there sharp ratio. but sharp with an e it's because it's named after Mr. Sharp who is? the guy that came up with the ratio well what did he do? it's not actually a ratio I don't think so I mean there's lots of if you see the sharp ratio calculation written down it's very unpleasant lots of maths-y type symbols I'm going to put it here I'm sure there'll be a picture on Google yeah there's bound to be sharp ratio is a way of comparing two different funds in a very specific way, which is really important.

5:57So that's what it is, and we'll get to detail in a minute. Oh, you're a tease. Oh, I know. So a way of comparing funds, but particularly when it comes to risk. Sometimes I have dreams that we're going to make it massive on this. Now, this obviously isn't the goal for the podcast, so the goal is to be helpful. But then I realise you talk about sharp ratio, and we're never going to be like 9 million. It ain't going to be Joe Rogan anytime soon. Or call me daddy and all of that. Jack married annoyed or anything like that. I was like, yeah. If I wanted to be famous, this was not the way to go. No, Gary Lineker's not knocking on the door.

6:33But that wasn't the reason we did this. No. But hey, if there's anyone famous watching, and you want... Yeah, exactly. We're doing all right. I would be a good celebrity. I don't think I'd get cancelled. old no i don't think i would either but i ain't got the energy you know i'm pretty forgiving i like all people i think i'd be right you would be all right so we talked last time like about how funds work uh better just check back actually yeah how funds work what they are a bunch of different acronyms and understanding the mechanics particularly um yeah and so this time we need to get a bit more sort of how to yes so if you haven't watched that i think i would stop listening and watching to this go back listen to go back and listen to number 34 because that will probably give you a good base because we're now going to talk about common mistakes and things and having that baseline understanding will be needed so how to avoid common mistakes when choosing a fund is it a mistake to choose a fund just because it's been performed well recently or is that a good thing keyword is recently there so look i mean everybody everybody looks at performance to a point but i said last time performance kind of stats are backward looking how has it performed in the past a given fund well that has no bearing at all on how well it's going to do in the future every piece of marketing and financial literature will say past performance is no guide to future and you know the orange man in the white house will just bomb somewhere else and well yeah i mean all things being equal past performance doesn't guarantee future performance but the The fact that we live in a volatile, pretty bonkers world at the minute doesn't help with that either.

8:10So performance status, basing your decision purely on performance status is unwise. But it's how most people... Yeah, and I do think if you can find a fund which is consistent... Yeah, that's why you want to focus on the word recently. Yeah, because, I mean, you know, one year of good performances does not like a pattern make. Especially not in a 50-20-year-old fund. No, exactly. If it's one, you know, but if you quite often see on fund like fact sheets and marketing material, they'll talk about quartiles. So that means, you know, if a fund is first quartile, it's in the top 25 % of its peers.

8:54In a similar? yeah it appears so in similar groups so if you are investing in a say a uk equity fund right and it was first quartile in the uk equity sector which is a sort of grouping of similar funds then it would be in the top 25 but over what period top 25 over one year but if it's bottom 25 over three years five years and ten years that's not consistent performance they've had a really good year that might have been blind luck or the fund manager might have changed If it's an activist. There's a ton of variables, right? You don't know which one it is. It's really hard to attribute what led to good performance.

9:31So looking out for funds that have performed well consistently, and that's not to say it's a constant upward trajectory. They will have absolute flows, but the point is across when you zoom out, if it's a gradual increase. You want it to be fairly consistent against its peers and against its own objectives, I think. so not just recently okay but you're going to look at performance but maybe zoom out a bit so how can you tell if a fund is riskier than others oh god i feel like i need to limber up for this listening dad just starting some stretches it was well just like i could literally go on for two hours on this but i won't i promise so riskier yep so we've done two episodes on risk, I think.

10:19I think we did two part, didn't we? Was it three? Yeah, I was just deciding if it was three. If it wasn't two, it was three. Yeah, right. So risk is like a multifaceted, slightly difficult to pin down thing. I think we did like risk the stuff you know and the stuff you don't. I think we did too. Okay. So when we're talking about individual funds, most people think of risk as a fund's up and downiness, for which the correct word is volatility. Right? So how much it goes up and how much it goes down. A higher volatility fund will go up higher and down lower. So when markets are doing well, it'll soar away.

10:57When markets are doing bad, it'll tank. Whereas a lower volatility fund, when markets are going up, it'll do well. And when markets are going down, it'll do less well. It'll go down a bit more. But it's a narrower band. Yeah, so it's higher risk, a higher reward, but also potentially higher loss. Yes, right? Definite link between risk and reward. So volatility, to get a bit mathsy, is kind of standard deviation around the mean. So how far, if the mean is the average return, how far does it deviate from that? Up and down, yeah. Right? So when we're talking about risk, when it comes to funds, that's usually what people are thinking about.

11:35It's up and downiness. Now, Mr. Sharp... He sounds like a great man. He was a mathematician, so you might not want to have dinner with him, but he's a very smart chap. I should check, actually, but I don't think it's Mrs. Sharp. Yeah, do you know what? We should check. We should check, because otherwise I will get cancelled. Because if it's a man taking credit for a woman's work, then it's the story of most women's lives. But... I'm joking. Sharp Ratio Originator. Robert Sharp. William F. Sharp, 1966. Nobel Laureate in Economic Sciences. Okay, all right, so he's at Clever Clogs. Largely for his work with the capital asset pricing model.

12:08He sounds fun, doesn't he? so sharp ratio well yeah exactly I didn't cure a load of people did he but you know so sharp ratio let's if you're comparing two funds and they're both investing in UK equities say it's apples and apples isn't it they're investing in the same sort of thing so you can say okay that makes sense if you're trying to compare UK equity versus Vietnamese small companies Which I often am. Indeed. Me too. All the time. I am so invested in the Vietnamese market. Small companies. Honestly, some days it's all I can think about. But if you're comparing two funds which are invested in different stuff...

12:52How do you compare? How do you compare? And the answer is the Sharpe ratio. So what Sharpe ratio does, hold this thought, bear with me, is it attempts to quantify the amount of performance, how well a fund is done, per unit of risk. so it attempts to quantify risk into a unit and say right for a given level of risk fund A has done 10 % in the last year and fund B has done 5 % so even though for investing in different things it attempts to standardize the risk so you can compare the performance super powerful that is like beyond how the hell do you even go about making that? well you've already seen the algebra let me just show you that and when did he invent this?

13:3519 or 66 right so it's not like he could quickly whip out like a super computer oh that is better than I thought it's better than I thought I think I might be thinking about another one but there is a sigma in it I don't know what that means but like just off topic this guy had the capacity to think that through with his mind yeah it's really smart people sometimes I have to like look inside the kitchen cupboard and work out like what I'm Yeah, what kind of cereal you want. No, as in like, is there a meal here? You know, that's a hard thing for my brain. Yeah. What? Just different strokes. But you have to think of it and then check it.

14:19And I don't even know where you start with stuff like that. It's different league genius, this stuff. But I mean, you know, it did win the Nobel Prize. He's not your run-of-the-mill mathematician, right? You're a Nobel laureate. So fairly smart dude, right? Sorry, I'm just feeling... Bit shit about myself now. So a sharp ratio is a useful way of comparing performance and standardizing risk. Now, to save everyone doing the maths, I presume there's like sharpratio.com. Pickafund.com, which is a great place to choose funds. Yeah. That's one of the ways you can filter and you can compare. There's no good figure for sharp ratio.

14:56It's higher is better. That's all. So it's not like two is good, one is bad. it's just that a fund with a higher shot ratio has a better performance per unit of risk than a lower shot ratio. Okay, all right, that makes sense. It's a useful thing for comparing. To be honest, most people just be like, yeah, right, just, you know, I'll just buy the one that all my mates are buying and that's okay. I bought the one that you told me to buy. That's why I have a job, right? Unfortunately, because I have a job, we can't say, hey, here's a really good option. I can't say that, I get in big trouble because it could be construed as advice.

15:29So you do have to do your own research, but we have a link to a couple of videos which will help you, meaningful money videos which will help you. Yeah, and clearly pick a fund as good. Oh, it's fab. Yeah, I love those guys. And it's free. It is free. So, first-time investors, this is overwhelming. I would have found it very, very tricky had I not had you. So what are some common mistakes, the biggest mistakes that first-time investors make when picking funds? It is overwhelming. I mean, literally, I'm just looking at Pick a Fund now, and there's 11 ,846 funds on it. Oh, plus 314 investment trusts and 2 ,410 ETFs.

16:06So you're talking 14 ,000 potential funds nearly. That's overwhelming. Massively so. By any measure. So what are the sort of mistakes that first-time investors make? I think one of the first mistakes is that the choice of fund is the be-all and end-all. To be honest, you'll probably be okay. What really matters is that you are invested at all. Yes. You know, the choice of fund is ultimately a detail, whereas if you're not invested, you're definitely not going to make money. If you are invested, you will. Yes. Over long enough. So first of all, you know, thinking that the fund is the most important thing.

16:43Second, thinking that they know what they're doing. Please forgive me and hear that right. Or be sort of over cocky. Yeah, yeah. Overconfidence bias is particularly prevalent in new investors. But I would say don't be so overcautious that you don't do anything either. I don't know, find the balance always. But I think a certain amount of humility, I mean, I've been doing my job 28 years. I don't know what I'm doing when it comes to investing. That's why I invest passively in passive funds that we've talked about. I think one could argue a lot of active fund managers don't know what they're doing because they don't get it right often enough.

17:15So I think, you know, I've seen it too often, you know, people commenting and emailing into meaningful money or particularly comments. It's like, well, just buy this. You know, I bought this and I made 200 % in my first three years. It's like, that's nice for you. But what about the next three years? If you can repeat it every year for the next 30 years, then I'll call you a genius. But chances are you just got lucky. So don't think that you know what you're doing. Yeah, just be humble. A bit of humility. And the last thing I think in terms of mistakes, particularly for sort of early stage investors, is kind of believing the marketing hype and choosing flavor of the month funds.

17:51So some of these fund houses, is the companies that produce and manage these funds, they've got massive, massive marketing budgets, right? And it's easy to be suckered by them because, like, you know, they can... Oh, my God, they can triple my wealth in three years. What the heck? Well, yeah, there's marketing and there's lying, right? But, you know, but yes, hyperbole is good. So you just need to sort of not be swayed by advertising messages, not be swayed by whatsoever's flavor of the month. I'm always deeply skeptical of, you know, here are the top 10 funds. it's like the top 10 today but those top 10 might be entirely different tomorrow and also top 10 depending on what well that's important yeah yeah top 10 in you know basing like how you view risk would impact that top 10 in what you want to invest in totally but I mean you know the money pages in the papers and online and stuff they have to have someone to write about so they'll always come up with top 10 things and if they change all the time boom you've got a new article exactly new article every month ideal September 2026 top 10 funds who cares just like pick one and stick with it for a bit yeah okay so when researching a fund are there any big ding ding ding red flags avoid to spot you know if you see a word or a phrase or oh no that would be too simple it'd be great because if that was the case then nobody'd ever use those words but i i get the question you know yeah yeah so we talked about charges last time yes so what What counts as a high charge or a low charge?

19:21So I wouldn't even consider a fund that was charging more than half a percent per year. And actually I would be looking for less than a quarter of a cent. So 0.25 % of the amount that's invested. That you put in? Or that it becomes... It's the value of the fund. Right, yeah. Right, so yes and yes. If you put 100 quid in, it grows to 125 quid. It's 0.25 % of the 125. Yes, it's usually charged sort of, it's kind of averages out over the year and they charge you as you go. So whether they charge you monthly, which is usual, they'll just take a strike point and it's like, okay, here's the value on that date.

19:58We're going to charge you that. So obviously, as we said, the more you pay to a fund manager, that money cannot compound for you for the future. But it's good to know what counts as good, because if you saw only, there's not even a full percent. It's 0.8%. That's great. But when you learn that there's ones that are 0.02 or something, you're like, oh. Well, Vanguard have just launched a global fund, which is 0.07, seven basis points a year. A basis point is one hundredth of a percent, for those that don't know. I mean, that's cheap, right? Because their version of that, I think they had a version of that at 0.21 before, so they've essentially reduced the price by two-thirds.

20:37Wow, yeah. I remember speaking to somebody with Vanguard years ago, and he looked me in the eye and said, if we could manage people's money for free, we would. Vanguard in America, the parent company of Vanguard, is a cooperative. So they're basically run for the benefits of the shareholders, for the investors, not shareholders. So, which is unusual in the finance world. Jack Bogle, who founded Vanguard, was a genius and a luminary, and he's dearly departed. But, you know, cheaper is better as a rule when it comes to charges on a simple basis that the less money you pay in fees, the more you've got to compound for the future.

21:13So watch for high charges. I'm usually skeptical of a fund which is small. We need to define funds. So remember we talk about pooling people's money together. Well, it doesn't take that many people these days to get a fund of, say, 10 million quid. 10 million quid is a micro fund. It's a really tiny fund. There are plenty of funds with tens of billions invested. Okay. That's a big fund. So I would be a little bit skeptical of a fund which is kind of less than 50 to 100 million. You want some kind of scale. And you can see that. You can see that, yeah, yeah. I always say total assets. With any fund you're looking for the fact sheet, go onto the website, you'll find it, or pickafund.com.

21:52You click through and it'll open the fact sheet, right? And it'll always tell you the size of the fund. Okay, and if it's, yeah, less than 50 to 100 million? If it's 50, I would be just not red flagging it, but marking it as a... Okay, it's not very big. Yeah, yeah. And particularly if it's a small fund, but it's been around for years, it's like, well, why is it small? Why is nobody investing in it? Why is nobody investing in it? Right? Unless it's real niche, right? It's investing in very small... The Vietnamese stock market. The Vietnamese smaller companies, yeah. Whereas if it's global equities and it's been around for 25 years, you would expect it to be in the billions.

22:25Okay. So, and that kind of alluded to it. The other thing I would be looking for is a new fund. Now, bear in mind what I just said about Vanguard. They've just launched a fund. They're going to sell it by the bucket load. Yes, but as a company, they're well established. Yes. And so you've got to kind of think a bit wider than just the fund, but a brand newly launched fund, particularly if it's in a sort of particular sector that the investment company has never done before, I wouldn't be going in at early stage. I'd give that three to five years of history before I even thought about investing in it.

22:56So these are the things you need to watch for. you want to watch for high charges, you want to watch for size of fund, less than 50 million, I probably wouldn't think about it. And you want, say, three to five years worth of history, ideally, as a new investor. Yes, it's funny to ask these questions, because 50 million is obviously a stupidly large number. But in this context, it's more when we if you don't know that you wouldn't know that. Well, to put it in context, my firm, Jackson's, we both work for is, you know, we're all the way down in Penzance, and even though we have clients all over the country, we look after 330 million.

23:31So a nationally marketed fund of 50 million is not a big fund. No. Right? So that's just context, really. Yeah. But that's context that unless you ask, you're not going to understand. You're like, wow, 50 million pounds, that's massive. Yeah, it doesn't take that. It's only 50 people with a million quid each, isn't it? Or 500 people with 100 ,000 each. And so you're like, that's not that many people. In the grand scheme of things. Okay, so let's put all of this into practice. Okay. So if someone has a stocks and shares ISA or maybe a pension, how often should they review the funds that they've chosen?

24:09Well, you should review it when you go in. So particularly the pension because you will have been put into a default fund. And you might want to change the risk based on. You almost certainly should change the risk. I still need to do that. Okay. Not being with Jackson's that long. Could be in a year, is it? And this is, life takes over, so don't beat yourself up. I mean, really. But how many times have we said this on this podcast? Okay. Such a shit. Terrible role model. Sorry, guys. Look, but actually it's a testament to the fact that life gets in the way. Yeah. So don't beat yourself up too much.

24:45Well, can you believe I've been in Jackson's for a year? I know. Amazing. This podcast has been going for nine months now. What? We started in January. Man, I live. No. Did we do it before January? I can't remember. I think it was January we launched. I don't know, but it's... Oh, on episode 34. Well, there we go. And we're on week 38, so you're probably right. So that's bonkers, isn't it? Yeah, it is. So, yeah, definitely, if you haven't already, review your default fund and your pension. If you've taken out stocks and shares ISA and you've chosen a fund, I think if you're a new investor, you should keep an eye on it but not change it.

25:26You should use it as a learning experience. How is the fund doing? You can't answer that without context. How is it doing relative to its peers? How is it doing relative to what's going on in the world? So if you're in a global equity fund, which we generally suggest that people invest globally, what's going on in the world? You know, the orange baby in the White House, as we like to call him, has he done anything stupid? Oh, my son. You know, is there anything else going on in the world that's been a major disaster or a new conflict somewhere or whatever? And has that affected both stock markets?

26:01You can see that information easily enough. And how has it affected the fund? Yeah, so if it's gone down a little bit in generally, but yours has really tanked. Ask why. Why is a really important question. And sometimes it takes a bit of digging. But if you're investing in a fund, they will update that fact sheet that we talked about. Well, they'll update it certainly at least every three months. and it's usually monthly. And there will usually be just a few lines of commentary on what's happened over the last month and why. Which I'm sure if it's a bit jargony, you can shove into chat, GBT. Exactly, explain this for me.

26:31And there's inevitably spin, right? Yeah, they're not going to be like, we didn't do so well, guys. Yeah, so us. It'll be like, you know, against expectations, this sector, you know. Manage to only go down by instead of predict it, you whatever. Yeah, exactly. Sort of. Just shove it in your AI bot of choice and get it to translate. any profit for you. So I think, to answer your question finally, how often should you, no, I'm saying sorry, how often should you review things? Formally review no more than annually. But I think if you're an early stage investor, it's good to just keep an eye and see how it's doing.