For anyone out there who has invested before, regardless of whether it is in shares, property, cash or foreign exchange (to name a few), you will know that there is no perfect formula which guarantees success. Like many things in life, you will be faced with situations you couldn’t have predicted and not everything will go to plan. The good news is there are ways to reduce this risk and you’re in the right place if you want to know more about what these are.
If you have been following this blog, you would have probably sensed a theme to the type of investment content we produce. When it comes to investing, we are big believers in the stats and in the words of Shakira the ‘stats don’t lie’ (or hips). Sure, it might be different this time but if history has taught us one thing it generally isn’t.
The SPIVA report is released twice a year by Standard and Poors, below are the 2018 results. Surprise surprise, the story hasn’t changed this time! It’s scary to think that anybody would invest their life savings in a way which history shows will pretty much guarantee failure every time. Let me show you what I mean:
What this table shows is the percentage of active fund managers (those who don’t simply mirror an index and instead try to pick stocks / time markets) who have under-performed their respective benchmark. Put simply, the higher the number in this table the worse the outcome!
For example, over 15 years 83.68% of active Australian fund managers UNDER-PERFORMED their respective benchmark. This includes those that are no longer with us (RIP). So if you invested your money 15 years ago you would have had a 16.32% chance that your funds returned on par or better than the benchmark. The best performers were Australian Mid / Small cap managers who beat their benchmark a touch over 50% of the time over 10 and 15 years up to December 2018. A coin flip would’ve yielded similar results, and also is much cheaper.
So, what’s the solution? Here are some of our suggestions:
- Don’t mind missing the party. The music always sounds good, until the police raid the joint. If something feels wrong, don’t join in just because it looks like everyone else is having fun.
- Focus on your objectives. Don’t get sucked into playing someone else’s game. If you focus on investing to meet your needs and circumstances, you will be less inclined to follow the crowd.
- Diversify. It is one of the most basic of investment principles, but one that people abandon too readily. If you spread your investments out sufficiently, you will minimize the impact of any one bubble bursting.
- Have an exit strategy. When you buy something, have a predetermined exit strategy. That way, if you are fortunate to see your investment go up, you won’t get drawn into holding on just because it seems to be getting more popular.
- Rebalance. This will help you execute tactics 3 and 4. As individual investments or asset classes rise, periodically trim them back to keep them in line with your planned mix. It’s a disciplined way of buying low and selling high (what we all want to do, right?).
The choice is yours – invest with a handicap or give yourself a head start compared to the broader population.