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How to back the right horse when investing

21 June 2024

Splitting your money across a number of potential winners is a better strategy than backing the favourite.

By Jonathan Jones,

Editor, Trustnet

Investing has a lot in common with horse racing. Both are gambles, but with enough study you can make an informed decision that gives you a better chance of success.

In the horseracing world, this means lower returns, as bookmakers shorten odds to ensure they pay out less if the favourite wins.

Investing, however, does not have such a problem. You back the right horse (or in this case, fund) and the returns are expected to be even higher than if you had gone for something else.

This analogy sprung to mind this week with Royal Ascot currently running – possibly the crown jewel of the horseracing calendar.

I enjoy a flutter on the races, but my strategy with horses is much like my investing pot. I put in what I can afford to lose and I spread it out on horses in each race, always betting each-way (where you get paid for the winner but also if your horse comes second, third, or in some cases even further back).

This strategy has worked well enough – I’m never going to pay off my mortgage this way, but nor am I likely to find myself in a pile of debt. So far I’m even up on the week.

The same can be said for my ISA. I have three funds at present, putting work in to deliver top returns. But this is not where the similarities end.

Like with horse racing, form is everything and even the top managers go through some tougher times.

For example, favourites such as Terry Smith and Nick Train, who would have made investors a lot of money over the past decade, are currently experiencing blips to relative degrees.

They will undoubtedly come roaring back at some point, but right now the conditions are less favourable. It is the same as backing a horse that runs on good ground when the race day is soft.

The conditions do not suit the horse, so it cannot be expected to perform as well in the environment. The same can be said for funds.

These quality growth managers surged during the low interest rate environment when their style of stock picking came to the fore. Now, with higher rates, the conditions are much more difficult.

If conditions turn, however, they should be back on form. But it is always worth having other bets on, just in case.

Picking a value fund, which should be coming into its own under these conditions, is one way to go.

Another is to back passives. They’re consistent, if unspectacular, but the same can be said about plenty of horses who have excellent results.

Either way, selecting a few good options with a fighting chance to win big in the future is a ‘safer bet’ than putting it all on the favourite. Particularly at the moment.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.