Many of us think we can beat investment markets or pick the latest stock that is going to make us rich. Even take a hot tip from the bloke at the local pub. We’ve all been there with the hope it will make us rich or at least make us feel better.
This happens more often as we strive to increase our wealth, build our retirement pool quicker or we just let the greed take over, all are normal behaviors that ultimately end to bad investment decisions.
Back in 2007 just prior to the Global Financial Crisis I purchased a company called Ramsay Health Care, you may have heard of them, they run private hospitals. At the time, I had been subscribing to an investment service that helped you select shares and at this point, I had been a financial planner for many years.
It was also at a time we were improving the way we invested for clients. Moving away from expensive managed funds (where investors funds are pooled and then invested in a selection of shares where you have no control).
It was a great company with long-term prospects. Then came the Global Financial Crisis, and luckily this was one of the few companies that did not go down like the rest of the market.
I had bought the shares at $9.786 in 2007 and sometime in 2012 the shares had increased to approx $21, a nice increase one could say.
Then stepped in a stockbroker, who we were also using to assist clients to build direct share portfolio’s who at the time convinced me that Ramsay Health Care was overpriced at the time and due for a price fall. I was unsure what to do at the time. He suggested I sell Ramsay Health Care and buy back when the share price fell.
Remember that stockbrokers get paid for selling and buying shares and it’s in their best interests to do so.
Anyway, I stupidly followed his recommendation knowing that I had made a decent profit already, so I had nothing to lose, or did I?
What happened next was a very expensive lesson and something I see people do time and time again. Certainly something I will never do again. Thinking they can play the market and win…
You see the share price never fell, it continued to go up and up and up and never fell below what I what I sold it for. I had always been looking to buy back in but that never happened.
This mistake cost me over $50,000, $50,000 of value to my investment portfolio. For some, that’s a yearly salary.
So what are my lessons from this mistake that could save you possibly thousands of dollars?
- Don’t think you are better than the market!
- You can’t perfectly pick the market, the bottom or the top!
- If you hold a perfectly good investment, don’t sell it unless its prospects look weak!
- Don’t listen to stockbrokers! Some might not like me saying this but there are inherent conflicts, but yes there are some really good ones out there
So, how do we invest client’s money today?
From all the lessons I have learned over the last 20yrs and in the pursuit of achieving better outcomes for clients we have realised we can’t beat the market and if someone says they can, I’d start running as fast as I can.
Here the thing, if you look at all the research, the experts have a hard time beating the market. Don’ forget they get paid for managing money so it’s in their best interests to promote it, the dream of getting better returns than the market.
Just look at the research from SPIVA>>
Looking at long-term performance over 10 yrs+, nearly 80% of fund managers struggle to beat the market.
There is also plenty of research out there to suggest that your asset allocation is what drives investment decisions, not individual stocks, although there are rare circumstances.
This research from Vanguard backs that up>>
There is also a general consensus among the investment community that buy and hold is the way to go. We are challenging the status quo.
If that was the case why was everyone upset during the financial crisis when most were expecting fund managers and super funds to sell down prior to the Global Financial Crisis if markets were expensive.
It was the old buy and hold approach, ride the wave, in this case, a very steep wave where many just fell off and never got back on which lead to a massive mistake driven by fear.
So, if you have a low probability of beating the market, buy and hold is dead in the water? So, what’s the alternative?
Enter the Status Quo approach.
We believe asset allocation drives the majority of the investment return, you should be diversified and use low-cost investments to access investments.
We believe we have found the middle ground. The majority of the industry will assess your risk, decide your asset allocation (which assets you invest in) and then hold those investments through good and bad markets (the old buy and hold).
However, we don’t believe that you should be invested in an investment just because your asset allocation dictates it. We especially don’t see why you should be invested in assets or investments that represent a low probability of gains in the future because your asset allocation dictates that.
So, rather than believing we need to sit on our hands, be patient and let the markets deliver the returns we now implement an approach that allows for active changes based on a combination of changing market conditions, reward for risk & take advantage of opportunities when they arise.
In other words, let’s say you are driving down a highway on a nice sunny day in cruise control. You notice a storm approaching, so you reduce your speed and take it more conservatively and when the weather has improved you increase your speed and keep going on your merry way.
In other words, when investments/assets look expensive we look to reduce the risk, place more in more defensive assets and if things look really attractive we increase the risky assets.
Unlike many other people in the industry, we are not limited to specific assets, our investment partners are free to invest in assets that provide the best value. For instance last year they started to reduce exposure to the US market and currently have zero exposure to the US market.
Our belief that clients will earn the best returns if you buy asset/investments at attractive prices.
How is this is done safely?
- All decisions are made through a highly experienced investment team made up of experts in asset allocation, economics and investment management.
- Decisions are based on the weight of evidence and made based on projected 10yr returns for each asset class. If low returns are expected, we don’t take the risk.
- Changes are incremental and our belief that sudden changes put our clients at risk.
- All investment decisions are communicated on a regular basis, so our clients are fully informed about why changes are being made, it allows them to be more engaged and connected to their money and investments.
- Every portfolio can be tailored to clients specific needs and all assets are owned by the client.
It’s not sexy, nor exciting. You won’t be able to brag at the golf course about your latest success.
It’s based on a boring logical approach to safeguard our client’s life savings to achieve the outcomes they set out to achieve.
Here’s the thing, most experts in the industry believe that they get paid for investment management. I would like to challenge that very few advisers add value through investment management. The industry has been sold on this. Wonder why you are paying a percentage of assets under management? Well, there is the reason.
We, on the other hand, are different, we charge fixed flat fees and use our time to help clients achieve results, help them manage their money better, help them live a better life, obtain financial freedom, pay debt down quicker, transition from a paycheck to a sustained income in retirement and spend time on the areas of finance we can control rather than pretend that we are fund managers.
Let’s say that you achieved every single goal/aspiration in your life and you never beat the market, would you comfortable with that?
I’ll guess your answer is yes to this.
Ponder that for a few minutes. If your answer is yes it goes to show there are more important things to you than just getting the best return, it’s about what I call return on life!!! Your ability to experience more in life is more important than market-beating returns.
But, you know what, there are going to be some reading this who want something more exciting, something they can brag about, something that is going to stress them out more and that’s ok as long as you are comfortable with that… There just not a good fit for us.
Hope that makes sense.
Let me know, are you someone that gets excited about bragging about your latest stock investment or are you someone that is more interested in living the best life, having great experiences and achieving all your goals and aspirations?
Respond to this email and let me know.
So, if you’re a professional, business owner or someone planning for retirement and are wanting to get your version of a personal trainer in finance and want more with less stress then feel free to book in a 15 min Possibilities call here>>> and we can start a conversation.
I’ll be honest here, we won’t do your pushups for you, but if you are motivated for the right reasons we can save you a lot of time and heartache and save you from the mistakes most people make to fast track your way to wealth.
Hope that’s been useful.
Make it a great Life!
Challenging the Status Quo!
Glenn Doherty – CFP – Founder & Financial Organiser at Jigsaw Private Wealth
Mob: 0401 253 729
Advice Disclaimer: Any reference in this publication to the provision of advice refers to advice of a generic nature, and should not be taken as product or investment recommendations. Before any action is taken based on the information provided, independent financial advice from a licensed financial adviser should be sought. Financial Freedom Project Pty Ltd ATF GA & DC Doherty Family Trust Trading as Jigsaw Private Wealth is a Corporate Authorised Representative of Exelsuper Advice Pty Ltd. The information contained in this publication is of a factual nature only and is not intended to constitute financial product advice. Information is current as at June 2018. This is an online information blog. It does not imply an offering of securities.