What Is The Best Way to Invest?
Our article last Friday showed that the large majority of professional investors were unable to beat the market. This means that if you buy a simple, broadly diversified investment that tracked a particular market index, you probably will have better returns after fees than investing with a professional manager.
It is no surprise then, that assets allocated to passive investments have sky-rocketed over the past 4 decades. However, professional managers are also fighting back and trying to highlight the benefits of their own strategies. If you were to compare the two camps, it would look something like two warring factions on opposite ends of a scale.
But “Is active or passive better?” is the wrong question to ask. It is possible to have a portfolio that leverages on the wisdom, efficiency, and diversification of markets, yet at the same time, maintain predictable outperformance. It would probably look something like this:
Nobel-Prize winning research such as The Size Effect (1981), Multi-factor Explanation on Asset Pricing Anomalies(1996) and Profitability (2012) has provided us with evidence that investing in a certain way can give you higher returns. These effects are both persistent and pervasive through time, giving us the confidence to allocate to these parts of the markets in the expectation of receiving higher returns.
Investing in this manner cannot be efficiently done via passive investment concepts. There are other issues with purely passive strategies, one of which is being a price taker.
So how do you make your investments more robust and go beyond the passive and active investment debate?
Limit concentrated active funds in your portfolio to 10%, so that it doesn’t skew your investment outcomes too much.
Increase the diversification of your portfolio both in terms of geographical sector as well as total number of securities.
Design your portfolio on the foundation of financial science, so that when the going gets tough, you will be more likely to stay seated with the knowledge that your investments are based on a robust framework.
Work with an evidence-based adviser, as studies has shown that such investors are more likely to stay seated during tough times, often leading to better investment outcomes and higher probability of reaching their goals.
However, it is important to remember that investment returns are only the tip of the iceberg when it comes to managing your wealth. What is more important is having a well-thought out financial plan that is able to cater to your life goals and all the things that are important to you.
In the same way that you would not attempt a high risk activity such as sky-diving without professional supervision, investors can benefit greatly by relying on an adviser — having the peace of mind knowing that their plan is in the hands of a professional.
If any of the points speak to you and you would like to have a exploratory discussion, click here to schedule a chat with us. (Our 30-minutes exploratory meeting is complimentary - either Zoom or In-Person)