Addressing the House of Commons in 1947, Winston Churchill said that ‘democracy is the worst form of government – except for all the others that have been tried”
That famous quote came back to me as I reflected on the recent period of market volatility and the investment philosophy embraced at Capital. Like forms of government, there are multiple options and strategies when it comes to successful investing, and we recommend the worst one.
Except for all the others.
Invest in “low-risk” assets
Investing in the stock market can be seen as risky. Stocks go up in value and down in value and as they say, ‘past performance is no guide to future performance’.
Research from the FCA confirms that 37% of investors in the UK hold their assets entirely in cash. A further 18% hold more than 75% in cash deposits.
It feels safer to stick to low-risk investments like cash, after all, if you put £1,000 in your cash deposit account, it will still be there in a year or 5 years.
Except it won’t. The best rates for instant access cash deposits are around 1%.
However, inflation is currently 9% which means that by keeping your cash ‘safe’ you’ve locked in a guaranteed 8% loss in terms of your purchasing power.
The least worst investment strategy; put your money into real assets that will, in time, experience growth above the rate of inflation.
Market timing
When the news headlines scream ‘billions wiped off shares’ it feels intuitively right to sell your investment, move them to ‘low-risk assets’ and wait for things to improve.
This is known as ‘market timing’ and is practised by many investors whenever there is a period of volatility. However, there is one major problem with this approach.
Most investors sell after the market has fallen and the losses have been experienced, not before. They then stay uninvested during the period that the market makes its inevitable recovery, which it always does. Therefore these market timers miss out on the growth which usually comes over a few concentrated days or weeks.
There has never been a time in history when a significant stock market ‘correction’ wasn’t followed by a recovery and a new market high. Avoid attempting to time the markets.
“Sell low, buy high – repeat until broke” Carl Richards
“Star” fund managers
In most professional pursuits there are superstars whose skills, talent and work rate set them apart from everyone else. In the world of sport, Roger Federer, Lionel Messi and Serena Williams are a class apart.
So, it’s natural to believe that when it comes to professional investing, there must be an equivalent. Surely there are some superstar fund managers who are more intelligent and skilful than anyone else and if we give them our money to invest, they’ll achieve great success?
Alas, the truth is somewhat different, and the recent markets have shown the star manager culture to be seriously flawed.
A recent article [1] in the Times highlighted the high profile and extremely well-paid fund managers who struggle to outperform a simple and low-cost index tracker fund. The pattern is familiar – a fund does well for a few years (often by luck more than skill) attracts a lot of money from investors and then performance suffers, the fund underperforms, and investors withdraw their money.
We prefer to recommend simple, cost-effective funds that are absent star fund managers (and the attendant costs) and are designed to capture market returns in a predictable way.
Stars lose their sparkle – best avoided.
”Flavour of the month” investing
It’s human nature to seek out new products, ideas and experiences. People enjoy trying the new restaurant that’s just opened, the latest West End show or iPhone model.
The marketing teams at the big investment companies understand this. They love to dream up new funds that capture the latest trends so they can sell them to the investing public. I’ve lost count of the ‘hot’ investment’ strategies I’ve been pitched over the years – from art and fine wine funds to student accommodation and even bloodstock.
The latest version of this is, of course, bitcoin, NFTs and all things crypto. Returns for some of these sectors were spectacular – until they weren’t. The recent collapse in the value of cryptocurrencies has shown that investors weren’t investing, they were speculating.
And speculation is not how you build your long-term financial security.
The largest sovereign fund in the world, the Norwegian Oil Fund with over $1.2 trillion invested, allocates capital only to shares, bonds and real estate and avoids ‘alternatives’ favoured by other large investors. We agree with this strategy.
Invest in what’s always worked, not what seems to be “working now”.
Pay an adviser
A significant number of investors choose to manage their own money and self-advise, presumably to save the cost of paying for a professional adviser.
That’s perfectly fine, except for a couple of important issues:
- It’s often not any cheaper to invest directly. A recent article in Investors Chronicle [2] explained that investors using the UK’s most popular DIY platform, Hargreaves Lansdown can pay over 2% of their portfolio per year in fees.
For this they get to select their own funds and hold them on the HL platform, but crucially no advice is provided and no access to the FSCS safety net if things go wrong. Many independent advisers offer investment advice, tax strategy and financial planning for less than 2% per year – as well as access to the Ombudsman and FSCS. - Numerous studies [3] have shown that hiring an adviser can lead to annualised returns which are over 3% per year greater than by attempting to self-manage.
This added value comprises several components, such as confidence to invest, smart tax planning, keeping fees low and behavioural coaching – helping investors navigate the challenging times and avoid taking action likely to derail the long-term plan.
When it comes to surgery, dentistry, or financial advice, hiring a professional is the least worst option.
Indeed, when designing the ‘perfect investment strategy’ it makes sense to realise that there is no such thing.
However, some are certainly better than others and it makes sense to follow the least worst.
Alan Smith
CEO
[1] https://www.thetimes.co.uk/article/the-star-fund-managers-who-cant-even-beat-cheap-trackers-xj2c3c3zf
[2] https://www.investorschronicle.co.uk/ideas/2022/05/12/your-investments-might-be-more-expensive-than-you-think/
2 thoughts on “The Perfect Investment Strategy for the Current Market”
“Sell low, buy high – repeat until broke” Carl Richards –
Brilliant ! Thanks, Mr Smith: that apercu was worth the price on its own (along with Graham’s “Where’s that letter?”)
Dear Mr Freeman,
Thank you very much for your comment, much appreciated.
Do let me know if you would like us to cover any particular topic next month.
Best wishes