With the right know how and an eye on the long term, it is possible to take control of your own funds. Nick Dewhirst examines how to beat the professionals at their own game
A central question behind many of my investment essays is, how is it possible to beat so many professionals at global money management for so long? How can other investors benefit from this experience? Have I found the Holy Grail or just been very lucky?
My 25 years working as a City professional made no difference; for the first two decades of managing my own pension my performance was precisely average. As the chart, showing the relative performance of this fund compared both to the FTSE World Index and the managed fund of my pension provider, demonstrates, that changed dramatically on leaving the City. There are various ways to put this track record into perspective:
• Based on five-year performance to March it beat all of the 235 managed pensions rated by TrustNet available to the public.
• It has not been beaten by more than 3% of them at any stage in the eight years since leaving the City.
• It beat the managed fund of my provider by 10% a year on average.
• This encouraged me to start a US-based ETF portfolio, which has also beaten all 400+ World Stock funds rated by Morningstar, even though it is constrained by CGT considerations.
In principle, others can benefit without spending all day short-term trading while glued to a Reuters screen. Indeed, the last switch within the pension plan took place almost a year ago. The secret lies in making a small number of big decisions, decisively. That was my purpose in building a global asset allocation system to generate recommendations that are entirely objective because it is computer-driven.
Clues to this performance lie in a willingness to accept short-term costs in the pursuit of long-term gains.
The first tip is to resist the temptations of 'free advice' bundled with money-losing investment propositions and instead pay for a subscription service. Few do, because the short-term cost is obvious and the long-term gain is not, and so the long-term rewards for those that do can be large, illustrating that market prices do not discount everything.
The second lies in spending time researching the subject. It is not necessary to become one's own fund manager, only one's own investment director. Fund management requires skill in stock selection, which can take years to accumulate as there are thousands of shares from which to select. Furthermore, it is the big picture that makes the big difference, so this is not cost-effective, and may better be delegated to professionals.
On the other hand there is a limited range of assets for an investment director to follow. I include the bond, forex and stock markets in the main emerging markets as well as all developed markets, together with the key investing styles and economic sectors in each region for which specialist funds exist. However, this still amounts to less than 200 subjects for my attention.
Focusing on such asset allocation and market timing decisions is most important, but that is where the least useful analysis is available. However, another reason lies in the way that the investment industry works. Professionals need to perform, and on time. Clients demand instant gratification and marketing departments pander to this, creating a cycle of launching new funds at the top and sacking under-performing fund managers at the bottom.
Mistakes are inevitable in any odds-based activity. Indeed, even the track record quoted above includes two distinctly average periods, from 2001-2002 and in the past year. If I sacked myself every time I had a bad patch I would never benefit from the good times.
Thus, here too the potential for long-term gains for clients is widely sacrificed to the overriding need among fund managers for avoiding short-term losses. Once again, there is no need to be an investment genius to beat the professionals. It is merely necessary to have the courage in avoiding such short-term foolishness.
How long can this investment approach continue to work so well? The answer lies in that human foolishness, so long as it persists. As this appears to be a universal facet of life in many different activities, the chances of long-term investment gain are high for those who can take the short-term pain n
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