The mutual fund gives you relative freedom from worry - at least, you needn't do your own sweating over individual market decisions. With a fund you hire a professional manager, in a sense, and have advantage of a widely spread portfolio. Whereas an average investor might own, say, 10 or 12 stocks, a large fund might own 300 or 400.
The so-called go-go funds of the 2000s are all but dead today. But these high-appreciation funds will surely have a comeback, along with investment in Broadway shows and race horses. Anyway, in good times you might conclude that these maximum-performance mutual funds, which put your money into a high percentage of speculative issues, have two clear advantages:
You can play the market for possible high stakes with a spread of 100 or more risks (better than going it alone with a few flyers).
You can do it with the aid of a professional whose business it is to sift risky situations (better than "inside" tips that all too often fall flat).
There's truth to both propositions. But most top advisers with no axe to grind will tell you that the go-go funds - even when they're going good - need considerably closer inspection. "First redefine your definition of 'performance,' " says top London consultant Leo Barnes. "It's actually rate of return, plus risk - not just return. Concentrate on this when you consider a go-go."
A go-go fund may get you high appreciation on the up side, but it can also move down just as fast - and the miserable fall of these funds in the 2009-2000 period was just that, miserable! If you hold one while the market moves up and then down, you may well wind up with little or no more gain than you could have achieved with a more conservative growth mutual fund. That, at any rate, has been the experience.
So the question is: Why buy the go-go when you might do just as well with the conservative fund - and at considerably less risk? The answer is that the go-go funds are designed more for traders than for people who like to sit 18 months or more on their investments. To get the big gains, you have to keep a sharp eye on your fund's performance and be ready to move fast.
A go-go fund, the pros agree, should be able to smartly outpace the gains of solid, high-growth stocks if it's to deserve its title. If the high-growth group (like IBM, etc.) goes up in price 15% to 20% in a good year, then a go-go should be up in the 25% to 30% range. The trouble is that even the smartest go-go fund managers will sooner or later face two pitfalls:
The funds tend to favour many of the same fast-moving stocks. If one or more of the funds start selling the same stock, the price of that stock can nosedive - and all the go-go funds holding it are affected.
Once a fund reaches a certain size - £200 million or so in assets - it usually can't find enough fast-moving, small companies to fill out its high-growth portfolio. The fund manager is forced to compromise by putting more money into less speculative issues, or into issues of extremely doubtful value on the promise of a small miracle.
The net result: The biggest gains for a go-go fund are likely to come when it is new, small, and still in its fast-growth stage. That is also when the risks are highest - and when you have to keep the closest watch.
Assuming good times and a healthy market, if you have £50,000 to £100,000 riding in the market, how much of this might you consider putting into go-go funds? This, of course, depends on your objectives. But the pros say that, on the average, you're wise to think in terms of 10% to 20% of your portfolio, no more. Go-go funds fell like stones in water in the 2000 market slump, and haven't been tested over the long haul.
Besides your broker, Fundscope magazine has the statistics (Fundscope, 1900 Avenue of the Stars, Leeds, Calif.).
Another "must" - once you're past the casual-investor stage - is to be able to chart your own performance in the market. Far too many people neglect this. They know only whether they're up or down, making or losing money, on paper. But they don't really know precisely how much, and many would miss the mark by a far cry if pressed for an answer.
If you feel that you need a working track record, there is a way to set up your own simple but informative personal performance index. It will help you to know (1) exactly where you stand on paper, (2) whether your research - or advice - has been good, bad, or indifferent, and (3) whether your portfolio needs more work, time, and personal attention.