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The world is becoming increasingly complex. Technology is playing a growing part in our day-to-day lives, whether in the cars we drive or the consumer electronics we use, and that complexity is feeding into financial markets too, with the AI theme and wider technology sector holding a dominant position.
That is somewhat at odds with a key principle of investing that you should only invest in something you truly understand. Legendary fund manager Peter Lynch once summed it up neatly by saying he would never invest in anything he could not illustrate with a crayon and a sheet of paper.
How keeping it simple can pay off
Lynch’s ‘keep it simple’ approach certainly paid off nicely for him. His Magellan Fund at Fidelity Investments achieved an average annual return of 29.2% during his 13-year tenure between 1977 and 1990.
What does this mean for the way you should manage your own investments in 2026? One takeaway is that when investing in individual stocks you could consider testing the waters by allocating your cash to firms whose products you recognise, understand and can easily research. If you feel out of your depth then you probably are and there should be no shame in admitting this. There is nothing clever about leaping in with both feet only to face big losses.
However, this could be a bit restrictive and largely limit you to consumer-facing names. Plus, avoiding areas like technology would have meant missing out on some of the biggest returns on offer from financial markets in recent years.
How funds can help
Often it may make more sense to invest through a fund to gain exposure to more complex areas. This offers a diversification benefit, meaning if something goes wrong with an individual holding other holdings within the fund can pick up the slack.
Your chosen fund could be a tracker, or you might look to an actively managed fund, where a manager can bring their own expertise to bear and can hopefully navigate some of the complexity for you.
If you have relevant knowledge or experience there’s nothing to stop you buying individual stocks in more complex sectors. It would though make sense to approach them with some care and to do some research on key industry jargon before getting involved.
In going down the route of entrusting your money to a fund manager, longevity is a key consideration. If the person at the helm has experienced a few market or economic cycles there is less risk of them getting caught up in putting cash into something without substance which is flavour of the month.
It’s also worth looking at a manager’s own knowledge and experience and whether you think they’re equipped to truly understand the areas where they are putting money to work. At the end of the day, it is no good pleading ignorance if you are caught out by investing in something you didn’t properly have the measure of.
Tom Sieber: Content Editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...