Oct 12, 2023 | STEPHEN JONES
We have been following the same approach to investing clients’ money since 2010.
PortfolioScience is built on academic evidence, Nobel prize-winning research and, most importantly, common sense.
As you would expect, we carefully monitor developments in the investment academic arena. Despite the significant changes in the world over the last 13 years, and the thousands of new investment papers published, the academic evidence still overwhelmingly supports this same approach to investing.
Long term clients may be familiar with the principles underlying PortfolioScience, but at trying times like these with interest rates high, markets excited about the possibilities of Artificial Intelligence, but also nervous about inflation– it’s perhaps a good moment to remind ourselves of them.
As Warren Buffett, one of the most successful investors of all time, noted:
‘To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.’
These six principles create the framework of our highly effective investment portfolios.
1 ACCEPT THE STOCK MARKET IS HARD TO BEAT
Academic evidence shows investors will invariably be better off investing in simple index investments. Paying an expensive ‘expert’ manager who has the aim of trying to beat the market using market timing and stock picking strategies will, most often, fail.
Each year Standard & Poors produce a simple scorecard of how actively manged funds have performed versus the relevant market index. And every year, the story remains the same – the vast majority of actively managed funds underperform their benchmark index over the medium to long term.
The evidence is clear and so we do not use expensive actively managed funds in our portfolios.
2 UNDERSTAND THAT RISK AND REWARD ARE RELATED
Investment risk and the return you can expect go hand in hand, and the stock and bond markets reward us for the risk of investing.
Generally speaking, the more risk you’re prepared to take, the higher the returns you can expect to achieve over the long term. But how much risk you have capacity for in your particular circumstances is a finely balanced decision, and should be driven by a sound financial plan.
We take into account your comfort with investment risk, what returns you need to achieve your life goals and the extent to which your financial circumstances can accommodate the ups and downs that investment in the stock market involves.
3 DON’T PUT ALL YOUR EGGS IN ONE BASKET
There is broad academic consensus that investors should have a diversified portfolio that includes different assets, spread and that invests in a wide range of industry sectors too.
The Nobel prize winner, Professor Harry Markowitz, determined that when different assets are combined together, the investment journey is smoother, without giving up returns.
Our portfolios are highly diversified, investing across a very wide range of assets globally.
4 FOCUS ON THE INVESTMENT MIX
The academics have found that it’s your mix of investments – how much in equities, how much in bonds – which is the most important factor in determining the investment return from your portfolio.
Although equities generally provide the highest returns, their valuations are the most volatile. An investment portfolio needs to be structured in a way that achieves the returns you require, without making you uncomfortable.
Although a portfolio consisting entirely of equities might seem the ‘best’ choice, as Ben Carlson, a well-known investment blogger, notes:
‘Investing 100% of your retirement assets in stocks may seem like the right thing to do on paper, but very few investors have the intestinal fortitude to pull it off in the real world’
Our relationship managers are very experienced in helping clients make informed decisions about the mix of their investments.
5 KEEP YOUR COSTS LOW
There are very few things about investing that you have control over, but how much you pay for investment funds is one of them. Our portfolios use very low cost investments.
There is a cost to using us as your financial planners, of course, but research by Vanguard highlights five ways in which investors working with financial planners achieve a superior investment return, equivalent to around 3% per annum.
The most important of these is behavioural coaching – ensuring investors don’t react emotionally to market events and subsequently make costly mistakes. We’ll keep investors on track to achieve your financial goals.
6 CONTROL YOUR EMOTIONS AND THINK LONG TERM
Which leads us into the sixth and most important principle, controlling your emotions. You could abide by all of the first five principles, but if you don’t control your emotions and keep a long-term focus, you risk coming badly unstuck.
We don’t know how the markets will perform in the short term, nobody does. But we do know that, in the long run, they’ve almost always rewarded investors with globally diversified portfolios.
As John Bogle, founder of Vanguard, the second largest asset manager in the world said:
‘the historical data supports one conclusion with unusual force; to invest with success, you must be a long term investor’
In recent years we have guided clients through the market volatility resulting from the Brexit referendum, Covid, the invasion of Ukraine and the Truss/Kwarteng Budget, to name just a few.
The future will certainly bring more, and we will be here to provide you with support and guidance.
Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.
This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action.
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