There is a common misconception that, in order to be a successful investor, we need to somehow outsmart the market and be in possession of information and knowledge that others don’t possess. The truth is that the vast majority of investors do not receive market rates of return from their investments. However, the problem is with the investor, not the investments. As humans we like to take action. Whilst our fight or flight instincts served us well when we were hunter-gatherers trying to avoid getting eaten by wild animals, they are nothing less than destructive when it comes to investing.
“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.” – WARREN BUFFET
- Investments are like bars of soap; the more you touch them, the less you have.
- You do not need to tinker with your investments trying to gain an advantage over the market and other investors.
Let us look at the returns for a simple investment portfolio over the last 20 years to 30 June 2018 (60% global stock market, 40% high quality bonds – see note 1 ).
- The investment return for the portfolio was 5% per annum net of all costs.
- This would have turned £100,000 into £265,000. Over the same period, inflation was 2.8% per annum.
Think about what has happened in the world over the last 20 years and returns comfortably above inflation were still available without having to try to ‘beat the market’.
Investing – simple but not easy
All you had to do was invest the money and have the discipline to sit tight when the inevitable and completely normal market falls arise every few years. This is where the problems start. When markets fall, the media will be screaming that “this time it’s different” and that you should exit your investments and re-enter the market “when things are better”. Utter nonsense. There is a huge weight of evidence that proves that this is virtually impossible to do successfully. The primary value of an adviser when it comes to investing is to make sure that you stay invested for the long term and ignore the rubbish written in the financial press. If you do this then you will outperform the vast majority of other investors. Please get in touch if you’d like a chat.
Note 1 – Source – Dimensional Returns Program – 60% FTSE World Index (GBP), 40% FTSE World Government Bond Index 1-5 years (hedged to GBP), rebalanced annually, net of total fees of 1.1% per annum (including investment management advice costs). Past performance is not necessarily a guide to future performance.