In terms of style, we are ‘value’ investors who pay heed to ‘value traps’ in this low growth environment.
We encourage our clients’ to foster a capacity for patience while pursuing a long term investing attitude. In recent years this has become challenging for investors as markets have become too short-term focused. Information is freely available (though much is ‘noise’ and has little value), stock turnover is at an all-time high and among fund managers, most are too obsessed with matching an index, which makes them more short–term then they should be.
Individual investors with a short term style cannot compete with large institutional money all around the world where microseconds can make a difference in computer driven trades. So, we consider it best to stick to the long term and play a different game. When we buy assets, we often focus on a very different timeframe and apply a different valuation and timing criteria than global institutional traders.
Even so, we are dismayed at the way the world’s Central Banks have manipulated interest rates, causing mis-allocation of capital and creating over-inflated assets. Risking a lot for a little has produced extreme asset inflation and required returns are now extraordinarily low. There are certainly risks all around and a lot of ‘noise’ in the financial papers as well as press commentary to filter. Many people are trying to sell stories about investing and this can obscure the long term for the unwary.
Managing risk is an important part of managing an investment portfolio and in this environment, it’s possibly THE most important aspect.
Risks are anything that can get in the way of an investor achieving their long-term goals. They can be grouped into two parts:
1) The destination – will the strategy achieve your objectives? Risks like poor long-term returns, poor execution of the strategy or having the wrong strategy all together.
2) The investment journey – how will you feel along the way? Will you be able to stick to the strategy? Risks like your tolerance of short-term volatility or comparisons to an index – am I different from everyone else?
So, what matters most – the journey or the destination?
Let’s consider two portfolios. Can you tell which has performed better?
It’s obvious isn’t it? Portfolio B was better.
What if I then told you the ‘benchmark’ return for Portfolio A was -4.9% and it therefore ‘outperformed’ by 4.8%, while the ‘benchmark’ return for Portfolio B was 2.4% and it ‘outperformed’ by only 1.7%. Would that change your view?
Well, it’s not quite as simple as that. It’s actually the same portfolio measured at different time periods. But how would you have felt if this was your portfolio and you reviewed it at the end of April facing a negative return for the year compared to a similar review at the end of July?
Let’s take a wider view of this investment over a longer period of time, where the red line is the portfolio value and the dark grey line is the index returns:
Much better, isn’t it. But would that review in April have put you off? Would you have made a short-term decision that affected your long-term goals?
Perhaps the most important factor is how the investor is positioned to meet their goals looking forward. Remembering that risks are those things that can get in the way of an investor achieving their long-term goals. Or, to look at it in a positive light, what matters most is whether the investor can maintain a high probability of achieving their long-term goals.
An assessment of possible returns over time and a constant view of the probability of success is a better measure of ‘performance’. In this way, a tailored portfolio within the framework can prove to be vastly more successful over the longer-term than a pooled investment caught up in the short term-ism of markets.
At Wotherspoon Wealth, we continue to focus on evidence, rather than anecdotes. This is because the benefits of a long term view can be destroyed by undue emphasis on short-term high returns and yearly performance. In our experience, absolute, long term returns and reliable income are what our clients value most.
If you would like to discuss your investment options further with one of our Wealth Management experts, get in touch today!
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.