Looking for somewhere to park that cash? Here are some ideas.

Funds

In my view, open-ended, actively-managed funds remain a solid choice for those looking to build their wealth over the long run, despite what happened with the Woodford Equity Income fund. That was a very unusual situation you’re unlikely to see again. Having said that, it’s important to do your research when investing in funds. Some have much better track records than others.

Funds that I hold in high regard include:

• Fundsmith: a global equity fund that focuses on high-quality businesses and has delivered stunning returns for investors since its launch in 2010

• Lindsell Train Global Equity: another top-performing global equity fund with a similar style to that of Fundsmith

• TB Evenlode Income: a UK-focused income fund with a great track record

• Franklin UK Rising Dividends: an under-the-radar dividend-focused fund that’s available with a low annual fee on the Hargreaves Lansdown platform

Just remember that it’s important to diversify your money over a few different funds, in case one underperforms. 

Investment trusts

Investment trusts could be another option to consider. The advantage of these is that, because they’re ‘closed ended’, you don’t need to worry about redemptions impacting the fund manager’s performance. In addition, they can also be cheaper than open-ended funds.

Some investment trusts I like include:

• Murray Income Trust: an income-focused trust that predominantly invests in UK equities but also has the flexibility to invest a little bit internationally

• City of London Investment Trust: a conservatively-managed UK trust with an excellent long-term dividend growth track record

• Scottish Mortgage Investment Trust: a global equity trust that invests in exciting growth companies (this one is higher risk)

Index funds

If you’ve had enough of portfolio managers, or you simply want to go for a low-cost option, index funds or exchange-traded funds (ETFs) could be worth a look. These enable you to track an index such as the FTSE 100 or the S&P 500, or invest in a particular style of stock, at a low cost.

However, I would caution against opting for a vanilla FTSE 100 index fund as I believe the Footsie has a number of major flaws as an index (too much exposure to low-growth industries, not enough tech exposure, etc).

Instead, I’d go for something like the iShares Edge MSCI World Quality Factor UCITS ETF, which invests in high-quality companies listed around the world.

Individual shares

Finally, another option is to cut out the middleman completely and build a solid stock portfolio yourself. These days, it’s very easy to do your own research and put together a portfolio of high-quality companies as there’s a wealth of investing information available online for free. Over the long run, this approach could save you quite a bit in fees.

If you’re looking for information on stocks to buy, the free resources here at The Motley Fool could be a good place to start.

The post Neil Woodford investors: here’s where I’d invest my money now appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Hargreaves Lansdown, Murray Income Trust, and Scottish Mortgage Investment Trust and has positions in Fundsmith, Lindsell Train Global Equity and Franklin UK Rising Dividends. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Once you wade through the waffle, however, it seems clear to me that this is one company that should still be avoided like the plague — and not simply because it was once a core holding for fallen fund manager Neil Woodford. 

Stable…for now

Revenue was very slightly up to £64.8m on a pro forma basis over the six months to Halloween, with almost three-quarters of this amount coming from the UK (and the remainder from the company’s operations in Canada).

This, however, couldn’t save the former market darling from swinging to an operating loss of £1.2m for the period. Once the impact of closing its businesses in Australia and the US are taken into account, a loss of £14.1m was recorded. 

As one might expect, attempts were made to accentuate the positive. Fairly meaningless numbers, such as the fact that Purplebricks had saved its customers over £150m in commission over the period, were highlighted. Relatively new CEO Vic Darvey also stated that management was “very pleased with the progress made” given the generally skittish housing market, adding that “diverse revenue streams” and 12% year-on-year growth in the average amount of money it is making per instruction had helped smooth things out.  

Remarking that the business is now “stabilised” is one thing, but I think the suggestion that Purplebricks is “enjoying profitable trading” is stretching things somewhat.

Cautionary tale

Today’s market reaction might not raise any eyebrows, but it’s worth reminding ourselves just how poor an investment the company has been lately. 

At the beginning of the year, Purplebricks’ shares were trading at 147p a pop. Go back to August 2017 and the very same stock was around 485p. As I type, the price is 104p.

Could this have all been foreseen? I think so.  

Purplebricks is a cautionary tale of what happens when companies try to grow too quickly. As mentioned quite a while ago, it’s risky expanding into new markets when you’re still attempting to verify the business model back home.

Indeed, this desire for growth at any cost is coming back to haunt the business and beginning to impact its balance sheet. At £41.6m, Purplebricks’ cash position at the end of October was 34% less than where it stood just six months earlier (£62.8m).

Not that management seems rattled, stating that it “remains confident” of hitting its medium-term target of holding a 10% share of the UK market. Personally, I’m struggling to see a catalyst for another purple patch that will be sufficient to raise it from the 4.1% share it held at the end of October. The company’s TV ads may have grabbed attention, but so too has the fact that it charges a fee to sellers even if it’s unable to shift their property. That might be a risk worth taking when the market is buoyant, but it becomes a significantly less attractive proposition in a Brexit-obsessed, recession-fearing UK.  

All told, today’s numbers haven’t changed my view on Purplebricks. I’d leave it to the traders and focus instead on finding quality businesses that can be held for decades.

The post Why I’m still avoiding this former Neil Woodford-approved growth stock appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

1. What goes up…

Thanks to another 12 months of political squabbling, the performance of the FTSE 100 over the year to date have been decent but hardly spectacular (up 7%). Across the pond, however, it’s been another cracking year with the S&P 500 soaring 25% and breaking more records on the way.

I doubt many would have predicted this at the start of 2019, especially as the US market was already priced at levels only seen twice before — prior to the Wall Street Crash of 1929 and before the dotcom bust in 2000. 

Something will give sooner or later, of course, but that’s not to say the market won’t continue going up between now and then. Indeed, 2020 could be another great one for those invested in the world’s biggest economy.

What can we conclude? Simply that market timing is very difficult, if not impossible, to do. Even top fund manager Terry Smith suggests it’s probably best not to try.

If being fully invested at all times feels hard, however, try drip-feeding your money instead. 

2. Adapt or die

Every year brings its fair share of market casualties. Some companies fall out of favour only to bounce back to form eventually. Others fold completely. 

Arguably the most high-profile example of the latter in 2019 has been package holiday operator Thomas Cook. While poor weather and our EU departure were contributing factors, it was the company’s failure to realise that more of us were arranging our own holidays online until too late that sounded its death knell.

The lesson from the above is that it’s absolutely vital for every retail investor to ensure they only back companies that are demonstrating a willingness to adapt to changing attitudes and behaviours. Since individual stocks tend to be far riskier than diversified funds, you should also only back them with money you can afford to lose. Having said this…

3. Watch for drift

Arguably the biggest shock (and subsequently, the most painful lesson) for investors in 2019 has been the suspension and eventual closure of Neil Woodford’s Equity Income Fund. 

A toxic mixture of bad news and strategy drift has left the former Invesco man’s reputation in tatters (not helped by his decision to continue charging fees while the fund was suspended) and hundreds of thousands of retail investors licking their wounds. As things stand, no one knows exactly how much money the latter will lose by the time it’s wound up. 

Perhaps the learning point from this still-to-be-concluded sorry tale is that no one — not even an experienced fund manager — can guarantee you anything in the market. The only thing that’s certain is that they expect to be paid for trying.

Woodford’s fall from grace also shows the importance of monitoring whether your chosen manager’s actions are in accordance with their fund’s overall strategy, more so than how each and every constituent of their fund is doing.

If all this sounds like too much trouble, then switching to a passive approach, either partly or fully, and buying exchange-traded funds that ‘merely’ track the returns of indices might be more appropriate. 

The post 2019’s biggest lessons for investors appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In it, I said that while I was bullish on the long-term growth story, I was a little concerned about the stock’s near-term prospects. That’s because there was a chance the company could be hit by a regulatory fine for continuing to recommend Woodford’s fund, or by legal action from angry investors that have lost money by investing with Neil Woodford on the back of the group’s recommendation.

Today, I want to provide an update on the situation as there’s been further developments since my last article on Hargreaves.

Legal action update

After my piece on Hargreaves last week, yesterday I actually received a press release email from law firm Leigh Day – the firm that’s looking into a potential legal claim against the broker. According to the email, the company has already received over 500 enquiries from Woodford investors in relation to a potential claim against Hargreaves Lansdown.

The email goes on to say that the team at Leigh Day believes Hargreaves Lansdown “either knew or should have known that Woodford Funds, in particular, the Woodford Equity Income Fund, were in trouble.” It goes on to say it’s investigating whether Hargreaves “misrepresented the health of the Woodford Equity Income Fund whilst continuing to recommend it.” Leigh Day’s aim is to help those impacted recover their lost investment, plus compensation for the “distress and inconvenience” they’ve suffered.

Bozena Michalowska-Howells, head of the consumer law team at Leigh Day, added: “The more we look at this the stronger our conviction becomes to take this forward. We believe that Hargreaves Lansdown’s continued promotion of Woodford Funds showed a cynical disregard for their customers whose life savings and pensions have been put at risk.”

Reading that press release, the case against Hargreaves appears to be gathering steam. And to make matters worse, another law firm, Slater & Gordon, has also said it’s now investigating claims Hargreaves misled its clients.

Reputational blow

Overall, I see this as bad news for Hargreaves. Of course, at this stage, it’s still too early to determine how legal action (assuming it goes ahead) might impact the broker’s profits. But there are other issues to consider, such as the broker’s reputation. A legal investigation into the company doesn’t good.

All things considered, my view on Hargreaves Lansdown shares is the same as it was last week. In my opinion, the long-term story looks attractive, however, until the Neil Woodford saga blows over, I think there’s risk to the downside, as the stock’s valuation is still quite high (forward P/E ratio of 30). Given the near-term uncertainty, the stock is not a ‘buy’ for me just yet.

The post Hargreaves Lansdown shares and the Neil Woodford saga: here’s what you need to know appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Funds pool investors’ money, so by using one of these structures to invest, you can buy a diversified basket of stocks at the click of a button. It would be uneconomic to build the same kind of portfolio by yourself after factoring in taxes and commissions. 

High-profile failure 

However, the Neil Woodford scandal has brought to light the risks of entrusting your money to one fund manager. Blow-ups like Woodford’s are very rare, but most fund managers indeed underperform their investment benchmarks over the long term.

High fees don’t help their performance either. Something Woodford was praised for when he started was his low fee ratio. He was charging around 0.75% to manage investors’ money. Some other funds charge more than double that. 

Considering all of the above, if you want to invest in a UK equity income fund that doesn’t charge high fees, and has virtually no risk of a blow-up, then I think the FTSE UK Equity Income Index Fund from Vanguard could be worth your research time. 

A passive offering

The Vanguard fund is a passive offering that aims to track the performance of the FTSE UK Equity Income Index.

As a passive tracker, all the fund does is buy the constituents of the underlying index and sits on them. There’s no investment team or manager making decisions. All the fund is designed to do is mimic the underlying index. 

The one big drawback of this strategy is the fact that the fund won’t produce stunning outperformance. But, on the other hand, it won’t underperform either.

Once fees are taken into account, over the past decade the fund has returned 7.8% per annum, compared to 8% for its benchmark – that includes dividends. 

Low-cost, higher returns

At the time of writing, the fund charges just 0.22% in annual management fees. However, Vanguard is owned by its investors and the more money that flows into the business, the lower the fees go. So, I wouldn’t rule out a decline in charges over the next few years. 

The Equity Income Index Fund has 128 companies in its portfolio, with an average price-to-earnings ratio of 12.6. The largest holding is AstraZeneca, closely followed by GlaxoSmithKline. At the time of writing, the fund offers a dividend yield of 5.4% with the dividend paid twice a year. 

All in all, I think the Equity Income Index Fund is a great way to invest in income stocks without having to do any leg work yourself.

 The low charges and passive nature of the fund should mean that you can keep more of your hard-earned money rather than paying excessive fees to a manager who underperforms. 

The post £5k to invest? I’d buy this hands-free, low-cost income fund that yields 5%! appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns the FTSE UK Equity Income Index Fund. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Is this bad publicity enough to make its FTSE 250 rival AJ Bell (LSE: AJB) a better buy? Today’s year-end trading update from the latter certainly won’t damage its investment case.

Customer numbers up

The number of customers served by the business rose a very healthy 17% to just over 232,000 in the year to the end of September, with a little under 35,000 more people using its platform service. 

Total assets under administration came in at £52.3bn — 13% higher than a year earlier. As the company stated, this was also far better than the 2% reduction achieved by FTSE All Share — the index comprising the FTSE 100, FTSE 250, and FTSE Small Cap indices. Platform assets under administration rose 16% to £44.9bn, with underlying inflows of £5.4bn. 

CEO Andy Bell — who still owns a sizeable chunk of the company — reflected that today’s numbers helped to show just how resilient the business model was, adding that savers looked for “established, trustworthy businesses” in the industry during times of political unrest. 

So, which one’s a better buy?

It’s a tough one. Both companies are ideally placed to benefit from the growing numbers of people wanting to have more control over their money. Both also generate sky-high returns on the capital they employ to grow their businesses.

And while Hargreaves has long been praised for its customer service, I’ve not come across evidence to say AJ Bell is lacking in this area either. Anecdotally, as a client of both, I’ve had no complaints. 

There are a few ways of separating the companies. Although dividends are unlikely to be of much concern to investors in either business, Hargreaves yields a forecast 2.7%, according to analyst estimates.

Befitting its growth credentials, AJ Bell yields just 1.6%. As you would expect from its top-tier status, Hargreaves is also the clear market leader (it had 1.26m investors on its books and £101.8bn in assets under administration by the end of last month).

On the other hand, AJ Bell’s smaller size arguably gives it more potential to grow. It also benefits from having no association with the aformentioned Woodford saga. Hargreaves, by contrast, could be subject to legal action from investors if it can be proven the broker was aware of issues surrounding the Equity Income Fund while continuing to back it.

Regardless of all this, what’s clear is the valuations of both companies remain high. Before markets opened this morning, Bell’s stock changed hands on 40 times forecast earnings (which might go some way to explaining why the share price isn’t sprinting away this morning). Following a period of weakness, Hargreaves has a lower but still-pretty-demanding forward price-to-earnings (P/E) ratio of 30.

Personally, I think both companies are worthy of investment, but only at the right price. For now, I’m content to do nothing and simply stick with my (small) holding in AJ Bell.

Should markets head south in 2020 as a result of fears surrounding global growth, Brexit, the US/China trade war, or some ‘unknown unknown’, that’s the time I’ll consider acting. 

The post After Woodford, is this FTSE 250 growth stock a better buy than its FTSE 100 rival? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares of AJ Bell PLC. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This is a low-cost tracker fund that invests in UK dividend-paying companies and sports a bumper yield. Here, I take a closer look at this fund and highlight the risks you need to be aware of.

Investment strategy

The first thing to understand about Vanguard is its investment strategy. A passive fund (meaning there’s no fund manager), it seeks to track the performance of the FTSE UK Equity Income Index – which consists of stocks listed on the London Stock Exchange’s main market that are expected to pay dividends that generally are higher than average.

At 30 September, the fund held 128 stocks, so it’s well diversified. Note, however, the top 10 holdings (below) made up over 40% of the fund, meaning there’s a degree of stock-specific risk.

Source: Vanguard

Yield

In terms of yield, this fund’s certainly a winner. At end-September, the yield offered was a bumper 5.2%. By contrast, Vanguard’s FTSE 100 tracker offers a yield of 4.2%. It’s important to remember though that yields fluctuate depending on the dividends paid out by the underlying companies in the index. Dividends are paid out bi-annually and will either be paid in cash or reinvested, depending on whether you invest in the income or accumulation version of the fund.

Fees

Another great feature of this fund is its super low cost. Vanguard has recently slashed the fees on many of its funds and, on its website, it advertises this fund with a low ongoing charge of just 0.14%. On Hargreaves Lansdown, however, the fee is still 0.22% (this may be reduced in the near future).

Risks

Turning to risks, there are a number of risks you need to be aware of. Firstly, the fund has high exposure to high-yield stocks. Nearly all the stocks in the top 10 holdings yield 5%, or higher.

Now, while this kind of strategy will help the fund generate a high yield, it may not produce brilliant total returns (capital gains plus income) over the long run. Interestingly, the fund has underperformed the market by a wide margin over the last five years, returning around 27%, versus 41% for the FTSE All-Share index. 

Secondly, the fund has a relatively high exposure to the financial sector. At 30 September, financials represented nearly a quarter of the portfolio. If this sector was to underperform on the back of a global recession, the fund’s performance (and its yield) could be impacted negatively.

Finally, with no fund manager at the helm, there’s uncertainty as to how the fund will perform in a major bear market. This fund was launched in June 2009, as markets were recovering from the Global Financial Crisis, so it’s unproven in a major stock market collapse. That’s certainly something to keep in mind.

Summary

Overall, given its high yield and low fees, I see this fund as a good choice for those who are looking to generate an income right now, such as those in retirement. If you don’t need the income right now, however, you may be better off in a fund that’s more focused on total returns, in my view.

The post Vanguard’s Equity Income fund: a good choice after the Woodford collapse? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Hargreaves Lansdown, Lloyds Bank, and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, Hargreaves Lansdown, HSBC Holdings, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Firstly, investor sentiment is weak at the moment due to Brexit and trade wars. Given the stock is seen as a stock market proxy, investors have dumped it. Secondly, the company’s reputation has been damaged as a result of the role it played in the Neil Woodford debacle.

So, what’s the best move now? Has the share price dip provided an attractive buying opportunity or should Hargreaves Lansdown shares be avoided?

Attractive long-term growth story

Let me start by saying I’m a huge fan. I use its investment platform for my Stocks & Shares ISA, my Lifetime ISA, and my Self-Invested Personal Pension (SIPP) and I think it’s brilliant. It’s not the cheapest platform out there but, overall, it offers a great service. 

I also like the long-term growth story. As I said earlier, Hargreaves is a stock market proxy. And what do stock markets tend to do over time? Rise. That means there are tailwinds that should drive growth over the long term. Combine that with the fact that Britons desperately need to save and invest more for retirement, and the long-term outlook for Hargreaves looks quite exciting, in my view.

Woodford howler 

Having said that, the company really screwed up with Woodford, in my view. The fact his Equity Income fund, which clearly had problems, was on its ‘Wealth 50’ best-buy list up until the day it was suspended, doesn’t look good for the company. Clearly, there were conflicts of interest there.

Now what concerns me here is that there are rumours the UK’s financial watchdog, the Financial Conduct Authority (FCA), could potentially fine the investment firm for recommending Woodford’s fund, despite its underperformance and risk profile.

Additionally, there’s talk the company’s failure to warn customers about the underperforming fund now leaves it open to legal action from angry investors. For example, Citywire reported yesterday class-action lawyer Leigh Day is probing a potential legal claim against Hargreaves after being approached by furious investors who’ve lost money from investing in Woodford on the firm’s guidance.

Personally, I wouldn’t be surprised to see an FCA fine or legal action taken against the firm, given the extent of the mess. And these kinds of shocks could see the shares fall further.

Time to buy?

All things considered, I don’t see Hargreaves Lansdown shares as a ‘buy’ just yet. Given the stock’s valuation is still relatively high, even after the recent share price pullback (forward P/E of 29.7), I think there’s risk to the downside until the Woodford saga blows over.

That said, I continue to like the long-term story associated with Hargreaves, so I’ll be keeping an eye out for attractive buying opportunities.

The post Hargreaves Lansdown shares are down due to the Neil Woodford saga. What’s the best move now? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, in the space of a few years, things have gone badly wrong for Woodford. After he was sacked as manager of his Equity Income fund last week, he may never work in the investment management industry again. With that in mind, here’s a look at three fundamental Buffett investing rules Woodford broke.

Never lose money

Let’s start with Buffett’s number one investing rule: “Never lose money.” Here, Woodford got it badly wrong. By investing a large proportion of his flagship fund in smaller, speculative growth companies, such as Purplebricks, Prothena, and Eve Sleep, he set himself up to fail as these types of companies are notoriously volatile by nature. You wouldn’t see The Sage of Omaha investing in these companies. 

One of the reasons Buffett has been so successful over the years is he’s placed a strong focus on capital preservation and kept losses to a minimum. He’s done this by focusing on high-quality, blue-chip companies with excellent long-term track records when it comes to generating shareholder wealth. If Woodford had adopted a similar strategy and focused more on risk management, he wouldn’t have experienced such dramatic underperformance.

Circle of competence

Another key rule of Buffett’s is that when investing in the stock market, it’s essential to stick to your ‘circle of competence’. In other words, stick to what you know. Woodford broke this rule too.

Woodford made his name investing in large-cap FTSE 100 stocks. For example, he loaded up on the tobacco giants when they were out of favour during the tech bubble, and he avoided the banks in the lead up to the Global Financial Crisis.

Yet, for some strange reason, he began investing in early-stage start-ups a few years ago. Investing in these types of companies is very different to investing in large-caps and it backfired in a big way. He clearly didn’t have the skill set required to be successful in this area of the market. Another Buffett quote comes to mind here: “Risk comes from not knowing what you are doing.”

Long-term investing

Finally, Buffett is known for his ability to hold stocks for a very long time. “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes,” he’s said in the past. This is another reason he’s been so successful, as long-term investing tends to produce great results.

Woodford broke this rule too. For example, around June/July last year, Woodford bought back into British American Tobacco after selling the stock in 2017. Yet just a few months later, the stock was gone from his fund again. So he was no longer investing for the long term and, as a result, his performance suffered.

Ultimately, investing doesn’t need to be complicated. But if you want to be successful, it’s important to get the basics right. I’d argue that focusing on capital preservation, sticking to what you know, and investing for the long term are three of the most important things you can do.

The post 3 Warren Buffett investing rules that Neil Woodford broke appeared first on The Twelfth Magpie.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Active funds can beat the market 

Personally, I still believe that actively-managed funds are one of the best ways to generate wealth over the long run. With this type of fund, you benefit from the experience of a portfolio manager, who will aim to outperform the market by picking out the most attractive stock opportunities.

Of course, it is difficult to beat the market consistently, particularly in the short term. Yet some portfolio managers do have excellent long-term track records when it comes to beating the market. For example, in the case of the Fundsmith Equity fund, which is run by Terry Smith, this fund delivered a return of 365% between 1 November 2010 (its inception) and 30 September 2019, versus 178% for the MSCI World Index, meaning it outperformed the market by a wide margin. Similarly, the Lindsell Train UK Equity fund, which is run by Nick Train, delivered a return of 389% between 10 July 2006 (inception) and 30 September 2019, versus 119% for the FTSE All-Share index. That’s more than three times the market return.

With a tracker fund, you’re never going to beat the market. However, with an actively-managed fund, it’s certainly possible. And bear in mind that tracker funds are relatively unproven in a major market downturn as they have only been around on a mainstream basis for a decade or so. That’s why I continue to favour actively-managed funds over passive ones, despite the fact that their fees are higher.

Understand the risks

That said, when investing in actively-managed funds, it’s crucial to be fully aware of the risks and understand exactly what you’re investing in. So, for example, with Fundsmith, be aware that it’s a concentrated fund that holds less than 30 stocks. This introduces stock-specific risk. Additionally, it has a heavy bias to the US. That’s another major risk. It’s also highly concentrated in three sectors – consumer staples, technology, and healthcare. So, there’s sector risk too. It’s essential to understand the risks before you invest. 

Risk management

Because each actively-managed fund has its own risks, it’s sensible to diversify your portfolio over a number of funds. In the same way that you wouldn’t just buy one stock for your portfolio, it’s not sensible to just buy one fund – it’s too risky. So, for example, if you’re looking to invest £10,000 in actively-managed funds, I’d split it over four or five funds with different portfolio managers and different strategies. That way, if one underperforms, your overall portfolio won’t be impacted too badly.

Overall, I still think actively-managed funds have a place in the modern-day portfolio. The key is to be aware of the risks.

The post Should you dump actively-managed funds like Fundsmith after the Woodford debacle? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon has positions in the Fundsmith Equity fund and the Lindsell Train UK Equity fund. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.