Giving you a window on the latest financial news and trends, and offering
our insights into what they will mean for you.
Sometimes we read an investment article that makes our blood boil. One regular such item is Bestinvest’s ‘Spot the dog – the guide fund managers would love to ban’ report. This report would be laughable if it did not have such a potentially serious impact on investors’ wealth. It is often quoted in the Sunday papers and can influence many DIY investors (those who do not seek advice) in their fund buy and sell decisions, despite the caveats that Bestinvest provide. It can also unsettle sensible long-term investors if they see a fund on the list that their adviser has recommended. While we have no problem calling out poor value for money in funds – which is far too common - the methodology used to identify ‘dogs’ is blunt to the point of being unhelpful.
Sometimes a picture – in this case a simple chart – provides us with a surprising degree of insight into the challenges of, and solutions to, investing well. The chart below plots the returns so far this year of the shares of all of the large and mid-sized companies that make up the broad developed equity markets (a little over 1,500 in total). The best performers are to the left and the worst performers are to the right.
The news today can feel a little bit unsettling. There is no doubt that these are tough emotional times for investors. Russia’s invasion and brutal war in Ukraine is unsettling on both a human and an economic level. The plight of the people of Ukraine and the broader pitting of Western values against totalitarian oppression weigh heavily. The impact of the war on energy, fertilizer, commodity and food prices, combined with global supply bottle necks and continuing Covid lockdowns in China are exacerbated by the growth in money supply from quantitative easing and financial support measures taken during the pandemic. This has led to a rapid rise in inflation globally to levels not seen for several decades. That can feel uncomfortable.
One of the greatest temptations in investing is to try to time when to be in or out of markets. It is logical to want to be fully invested in the equity markets when they are going up and to be in cash when they are going down. Yet logic transforms into emotion at times when markets feel a little bit frothy on the upside, such as the late 1990s or even 2020-21, or full of gloom and despair on the downside, such as the depths of 2003 (technology crash), 2008-9 (global financial crisis), or even Q1 2020 (Covid). It is worth remembering that every decision to get out of equities also requires a decision on when to get back in, and vice versa. It would be great news if there was a clear signal that allowed us to make these calls, but as the great John C. Bogle, the founder of Vanguard once said:
We associate the term ‘bond’ with mutual connection, whether the subject is chemistry (between atoms, ions, or molecules), personal relationships (between human beings), or finance (between borrowers and lenders). The latter is often thought to be difficult to understand and shrouded in complex mathematics. Actually, bonds can be quite a straightforward concept.
The world of investing can feel a daunting place. Industry jargon dominates the financial media and is riddled with acronyms and discussions around the outputs of complex models. These details need not concern the vast majority of investors, however. In fact most investors, both professional and amateur, would do better to ignore such musings. A basic grasp on some of the mechanisms of capital markets will generally suffice to enjoy a successful investing journey.
Investing is simple, but not easy. The decision to invest in the first place requires foresight, as well as the discipline to deny oneself spending today so that you don’t have to eat own-brand baked beans out of the tin in retirement. The second is deciding how much you want, need and are able to invest in equities, which will act as the drivers of positive portfolio returns, above inflation, that will help fund future spending goals. Getting this right is key and where good advisers can add value. Next an investor needs to decide the broad structure of their equity and bond components of their portfolio. A good place to start for equities is the structure of the global markets, which defines the basic country, sector and company weights and offers broad diversification. As Eugene Fama, who won the Nobel Memorial Prize in Economic Sciences, said in a recent webinar:
Modern society loves a ‘star rating’. Most know what to expect if they book a 5-star hotel stay for a business trip when compared to a 3-star bed-and-breakfast for a weekend away. The investment field is no different, with many institutions offering their own spin on star ratings and how to calculate them. Unlike the hotel industry, many of the rating systems that assess the funds used by investors are best ignored. In this short note, we investigate why.
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