Our view is that investments are simply tools to make a financial plan work, but it is still important to have a sensible and logical investment process.
There are two basic ways to invest.
- ‘Active’ investing, where the aim is to tactically switch between fund managers and/or different types of asset to gain an advantage and ‘beat the market’.
- ‘Evidence-based’ investing, where decisions are made based on long- term evidence as opposed to short- term predictions and guesswork. Intuitively, active management feels like a pretty good idea, but there is an overwhelming body of evidence showing that the vast majority of active managers don’t beat the market. Worse still, the small percentage of managers who do beat the market, don’t tend to repeat this feat the following year. There is no reliable, repeatable process for picking the winning managers in advance, but this doesn’t stop the majority of investors (and their advisers) trying to do so.
Rather than try to predict the future, we examine the evidence and therefore:
- Avoid active fund managers.
- Keep costs low – active management is expensive and unreliable.
- Trade as little as possible – investments are like a bar of soap – the more you touch them, the less you have.
- Avoid the latest investment fads – the financial press loves shiny new things!
- Manage your expectations and emotions and ensure that you stick to the strategy.
With evidence-based investing, the odds of success are much greater as there is no reliance on making predictions and forecasts. There is no crystal ball required to be a successful investor! I have no doubt that active managers are good people, trying their very best to make you money, but the truth is that the numbers don’t stack up. Luckily, there is a better way.