Minimising cost is crucial for long term investment success

Costs matter a great deal because investment returns are reduced pound for pound by the fees, commissions, transaction expenses and any taxes incurred. Investors as a group earn somewhat less than the market return after deduction of these associated costs. Therefore, by minimising costs, investors improve their odds of meeting investment objectives.

Markets are Efficient

Our core belief is that markets are “efficient”, meaning that prices reflect the knowledge and expectations of all investors at any given time.

The Efficient Market Hypothesis says that market prices are fair: they fully reflect all available information. This does not mean that prices are perfect; some prices may be too high and some too low, but there is no reliable way to tell. In an efficient market, investors cannot expect to earn above-average profits without assuming above-average risks. Market efficiency does not suggest that investors can’t “win.” Over any period of time, some investors will beat the market, but the number of investors who do so will be no greater than expected by chance.

Risk and Return are Related

It surprises many investors that the potential for financial loss is also the reason that they earn a return.

We all face risk because nobody can reliably predict the future – but we know that risk, return and time are interconnected.  Higher exposure to the right risk factors leads to higher expected returns but is no guarantee they will be achieved.  The bottom line is that risk must be taken to achieve a return. The risk is, therefore, the currency of return, in that a greater return can be considered a payment to investors as a reward for subjecting their capital to greater uncertainty.

Diversification is Key

If an investment portfolio does not fairly reflect the overall investment market in terms of balanced asset allocation (the process of dividing investments amongst different asset classes such as stocks, bonds and cash) and investment style (such as growth or value), we believe clients are taking additional risk. Our judgement is that this is strategy is unlikely to prosper over the long term.

Market timing and performance chasing are losing strategies

It is important that an investor has an investment philosophy, for this guides and shapes decisions. Even if the theory is one of random chance, this would require a consistent approach to implement it. The problem with investing is that it becomes an emotional experience – and it shouldn’t. When you see your portfolio rise or fall in value, you have a gut reaction, often this is not good for you. There is a temptation to believe that beating the market is due to additional skill or knowledge, a belief forcefully proposed by active fund managers, who make their living by beating the market – or trying to do so.

The harsh reality is that few of them do (really few) and when taking a long-term perspective it is very difficult indeed to pick those Managers that can consistently outperform. Most Fund Managers don’t hang around for long, many funds get closed and when you consider the charges they apply, few (and I really mean a few) actually outperform.

Would you prefer evidence or guesswork when planning for your future?

My role is to help investors achieve the market returns for the various assets into which they invest.  The main point is that when investing your money, I do not see any advantage in putting it at additional risk. This is essentially what most investment managers have to do in order to beat the market.

Economic theory has supported and evidenced this approach over the long-term. Particularly by Eugene Fama was awarded a Nobel prize for economics. His research and theory together with that of others have helped inform the research used an investment philosophy that we adopt for our clients.