Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Markets are rallying: should I dump a fund that’s been left behind?
Two major stock market indices in the UK and US have just hit new record highs, the FTSE 250 and S&P 500 respectively, and the FTSE 100 is at its highest level since February 2020. Investors are likely to be in a good mood as portfolios could be looking flush.
Looking at my own portfolio, nearly everything has recovered from the losses caused by the pandemic-driven market sell-off in early 2020. The outlier is an infrastructure fund which is still trading lower than my December 2019 entry price.
It’s frustrating to see red figures on the screen when I look at my portfolio. In this situation, one’s instinct might be to cut the losses and move on. However, the benefits of being patient with investments must not be forgotten.
I bought the infrastructure fund to help diversify my portfolio and its role hasn’t changed. A truly diversified portfolio would not see all its holdings move in tandem. Ideally, you should expect them to move differently and not be influenced by the same factors.
It’s important for investors to remember this point, even when markets in the UK and US are in bullish mode such as we are now experiencing.
Faced with a similar situation, I’m sure there would be some readers who would sell their underperforming investments and use the proceeds to buy more of their winners. After all, if something is doing well, why not own more of it? In doing so, there is a risk you would crystalise losses that may only be temporary and buy something else where all the good news has already been priced in.
The infrastructure fund in my portfolio generates an income for its investors, so I’m effectively being paid to wait for its valuation to increase. I do not currently need this income and instead I reinvest all the dividends by owning the accumulation version of the fund. That means my holding slowly increases in size without me having to put my hand in my pocket to buy more fund units.
A considerable amount of infrastructure work is defensive in nature and doesn’t disappear when the economy weakens. For example, many infrastructure funds invest in projects or companies doing the work on electric, gas and water networks, or road and rail improvements. When markets are weak, earnings should continue to hold up from infrastructure work and therefore share or fund unit prices should also be resilient.
It’s easy to focus on the positive parts of the stock market and celebrate shares or funds going up in value. However, a good investor should take a broader view of the world and note areas of weakness as well as strength.
For example, China’s SSE index has been a miserable performer this year relative to the UK and US, down 1.5% year to date. That may have negatively impacted an investor with an emerging market fund in their portfolio. However, it’s not a reason to panic.
There will normally be strong and weak parts of your investment portfolio and the trick is not to keep fiddling with it – unless the investment case for a stock or fund has changed dramatically. Patience is the key to successful portfolio management.