How Woodford’s downfall can teach us all to be better investors

Posted by Adrian Lowcock in Fund and industry updates category on 25 Oct 19


After nearly 5 months of trying to restructure the LF Woodford Equity Income fund, and rescue his career, Neil Woodford has lost the battle. The fund was suspended in June amidst liquidity problems following a run of poor performance and concerns about the fund’s exposure to unquoted stocks. Investors have suffered the most from this outcome but in truth no-one has really benefitted. However, we should all try and learn from this unfortunate situation. It might make us better investors and hopefully either avoid similar situations in the future or minimise the impact they have on our finances.

Diversification

Risk comes in many forms. We tend to think of it in relation to a currency, a company, an industry or an asset class but it is also risky having too much exposure to a single fund manager or fund management company. When investing, try to ensure you not only have exposure to different assets and regions but think about being well diversified by investment style, company size and don’t hold too much with one individual fund manager - no matter how good you think they are.

Know your Investments

It is your hard-earned money that goes into funds so make sure you know what you are getting. Whilst detailed breakdowns of the underlying investments are hard to get hold of, you can make sure the manager is investing according to the funds objectives and investment philosophy. You can also use the Willis Owen X-ray tool to obtain some detailed analysis of the fund.  Read the fund manager’s reports to get an idea of what they are doing. If it does not feel right then consider alternatives.

Recognise and learn from your mistakes

No matter how good an investor you are, you will make mistakes. This is true whether you have just started out or you are Warren Buffett. A successful investor is not someone who never makes a mistake, but someone who quickly recognises their mistake, corrects it and then learns from their mistake so they can reduce the likelihood of repeating it.

Hold a cash reserve

Being in a position where you have to sell an investment when you do not want to can be damaging to your wealth as you have no choice but to take the price you are offered at the time. It is important to have some liquidity, sufficient savings to pay for day to day spending but also to cover any unexpected bills that may come in. In times of extreme stress, such as the global financial crisis, many investments become hard to sell, or the value plummets significantly as more people look to get out.

Keep it simple

It is easy to overcomplicate investing and to try too hard. The key is to keep it simple. Some of the best fund managers are those that have their investment philosophy memorised and can explain it quickly and clearly. You do not need to be an investment expert to understand it either. A manager’s skill is not solely in his or her philosophy, it is also in the execution of it. The ability to find companies that meet their criteria and to stick to their investment process.

Fortunately events like the collapse of Woodford Investment Management are rare.  Although there are risks involved when investing, with some prudent planning and common sense the impact of those risks can be reduced.

Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.