Does Brexit have you feeling anxious about your finances? Do you worry that your money has a mind of its own? When circumstances seem out of your control, it’s important to focus on the facts and establish a robust plan. Extreme headlines are designed to grab your attention. If it sounds catastrophic or too good to be true, if what you are being offered is an unsupported opinion then proceed with caution when it comes to making investing decisions.
Trying to guess or time the market, more often than not, results in a loss, and chasing the latest ‘hot tips’ can often lead to misfortune (read Martin’s recent blog for more on this). Fundamentally, capital markets work because share prices are a product of all of the information publicly available – in other words, the share price can only be fair. Relying on gut instinct when it comes to investing is not a sustainable approach. You may get lucky with short-term gains, but nobody wins forever without a solid strategy.
Likewise, investors cannot rely on past performance to predict future returns. Funds that were top performers last year are statistically unlikely to repeat their results. Investors perusing the Money section of the Sunday papers will likely be disappointed. Performance that is based on only a few years of returns cannot be extrapolated into the future. It’s easy to be seduced by media headlines, but the facts reveal that only 21% of top-ranked equity funds remain in the top quarter of returns in the following three years 1.
So what’s the solution? It’s simple – we focus on evidence. Evidence-based investing (EBI). This is a methodical and structured approach to portfolio development, which aims to capture the returns of various markets and “factors” of return (more on factors later) through a low-cost, diversified and long-term investment strategy. It is an approach based on verifiable facts and observation, and Nobel Prize-winning science. There are three concepts that are at the core of evidence-based investing: diversification, low costs, and having long-term strategy.
Decades of research proves that a broadly diversified portfolio, managed at a fair cost, without obsessive tinkering or tampering, will deliver the best returns over the long-term.
Diversification Explained
Diversification means investing in a broad range of assets across different classes (such as equities, bonds, etc.), geographies and other factors. It allows investors the spread risk and take advantage of the returns that are on offer against the whole of the market. It protects you against the proverbial – “too many eggs in one basket” scenario. This approach aims to mitigate market falls while producing secure and reliable returns i.e. the financial crisis, Brexit.
Well-diversified portfolios are made up of assets that do not correlate precisely with one another – they are separated by geography, industry or other factors. So when one asset or geography is performing very poorly, the returns from elsewhere can smooth out the falls. This means that investment returns are balanced against lower risk, and fund performance is less reactive to very sharp falls.
Industry Fees Explained
Most investors understand that good financial management is a service worth paying for – as long as the price is fair. However, some wealth managers make their fees disproportional to the service they are providing and difficult to understand by intentionally hiding or layering them in ways that make it unclear exactly what the investor is paying, and how this affects their returns. It’s important that you look into how your being charged for managing your investment. You should clearly understand what you are paying and how this will affect your returns.
Fees that are typically charged include set-up fees, ongoing management fees, and platform costs. The more an investment manager tinkers with your portfolio, the more transactions they will be carrying out, and every transaction attracts fees. On top of this, you can also be charged an exit fee if you wish to cease investing with a particular firm.
Many financial advisers charge fees in excess of 2% per annum. It is not unusual for managers to be charging even more. Fees are one of the main determinants of investment returns over time, because compounded over time, high fees drain away your returns. Conversely, reducing fees leads to maximising overall net performance. Investors need to be sure that they are getting a fair service in return. (See our blog post on the £64 Billion Investment Scandal to learn more.)
Long-Term Returns Explained
Investors should aim to remain invested in the markets over a long-term period. How long is long term? Ten years is a good benchmark to aim for, though of course if you’re saving for retirement you might be in it for much longer. Warren Buffett is famously quoted as saying his favourite holding period is forever!
The advantages of long-term investing are somewhat obvious. With a long-term approach, Investors can ride out market turbulence. When you stay invested for the long term, your money is able to grow unhindered.
Buying and selling assets attracts additional charges. Whilst it’s important to rebalance portfolios annually, values over the longer term are more likely to increase without the burden of excessive trading fees. Choosing the right portfolio and sticking to it is more cost effective than regularly buying and selling funds, stocks, or trying to time the market. Furthermore, buying and selling because you have a ‘hunch’ or someone gave you a great tipoff, rarely pays out. “Active” Investing is a zero-sum game and treating it like a gamble is high risk and unsustainable. There is a much more sensible way to invest…
Straightforward Planning with Wilcocks & Wilcocks
At Wilcocks & Wilcocks, we embrace evidence-based investing. Our clients trust in our expert knowledge and feel confident in our ability to not only manage their investments successfully, but to also help them plan for and live the best lives they possibly can.
We believe in following a tried and tested strategy. We won’t ever charge you ridiculous fees; we are transparent with how we manage your wealth, and we genuinely want to see you happy in fulfilling your life-long dreams. We can provide you with a practical solution for the long-term by cutting through the noise and aligning our evidence-based investment insight with your future ambitions.
If you would like to learn more about our evidence-based investing approach and how it could save you thousands of pounds, please contact us today.
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1 Source: US Mutual Funds Remaining in Top Quartile of Returns (2008-2018 average) US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Index funds and fund-of-funds are excluded from the sample. Equity fund sample includes the Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/ Mid Value, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, MidCap Growth, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Small Blend, Small Growth, Small Value and World Stock. Fixed income fund sample includes the Morningstar historical categories: Corporate Bond, High Yield Bond, Inflation-Protected Bond, Intermediate Government, IntermediateTerm Bond, Muni California Intermediate, Muni California Long, Muni Massachusetts, Muni Minnesota, Muni National Intermediate, Muni National Long, Muni National Short, Muni New Jersey, Muni New York Intermediate, Muni New York Long, Muni Ohio, Muni Pennsylvania, Muni Single State Intermediate, Muni Single State Long, Muni Single State Short, Short Government, Short-Term Bond, Ultrashort Bond and World Bond. See Dimensional’s “Mutual Fund Landscape 2018” for more detail.
