Leave speculation to the gamblers

If we are out of a particular global market we may not recoup the lost growth for many years. 

If we then change our stocks again to capture tomorrow’s market returns, then we are reducing our capital value as a result of buying/selling fees and taxes. This is not the way to invest but unfortunately many investors do this.

Key points

  • When markets are falling, the temptation can be to panic.
  • If the investor loses money, they can be nervous about getting back into the market.
  • Limiting investments to a handful of stocks is risky.

How to invest

There are more than 98m trades a day in the global market which is an effective information processing machine. The real-time information from trades helps set the market price. 

Rather than buying retail funds selected by a fund manager, buy a diversified basket of global index tracker funds and let the markets work for you. Holding a wide basket of stocks from around the world, linked directly to market returns, can reduce the risk of trying to outguess the markets, or worse, paying somebody to outguess the markets.

Investment returns are random: they cannot be predicted with any great future certainty. Therefore, no one can say, with conviction, which financial sectors an investor should buy to get the next best return on their investments. 

Therefore, limiting an investment universe to a handful of stocks, or even to one stock market, is a concentrated strategy with high-risk implications. 

Do not try and guess which parts of the world will outperform others, or whether bonds will outperform equities, or if large stocks will outperform small stocks. Buy the global market using a diversified basket of index tracker funds and leave the speculation to the gamblers. 

Be patient

Investors should be patient. It is not a good idea to jump the minute the market starts to drop. Manage the investor’s emotions by encouraging them to invest in a risk portfolio that is correlated to their capacity for loss, not one that is based purely on your search for the highest returns.

Remember, investing is for the longer term. History says you will be rewarded for your bravery – and patience.

Ensure you have a cost-effective (that is, low fee) portfolio. It is the hidden fees and costs that are taken from your fund as service costs, annual management charges and discretionary management that are often unnecessary.

Try keeping the costs of managing the client’s portfolio to less than 1 per cent.

The industry average cost of using a conventional financial services company is in the region of 2.3 per cent. Saving even 1 per cent a year will have made a substantial amount of money using compounding interest over the life of the portfolio. 

Finally, try to manage emotions around investing. When the client wants to invest, select a diversified basket of index tracker funds invested globally, and the investor should hold their nerve, even when markets are falling. And keep the fees below 1 per cent.