Finance

PATIENCE

Andrew Fort B.A. (Econ.) CFPcm Chartered MCSI APFS, Certified and Chartered Financial Planner, Fort Financial Planning

Investing is a risky business. After all, no one in their right mind would take a risk if there wasn’t at least a prospect of them being better off at the end of it.

There are, however, ways to reduce some elements of risk. Diversifying across different asset classes reduces risk because, for example, when the value of shares are falling it is often the case that other asset classes (such as fixed-interest investments) are rising in value. But it doesn’t avoid risk entirely as there may be periods when both asset classes fall in value.

A hallmark of investing is uncertainty and there are those who believe that uncertainty can be utilised to their advantage. Fund managers, who control in excess of 95% of the world’s stock markets, are generally among the most highly qualified individuals in the world – a first-class degree typically being a prerequisite. They all suffer from one fatal flaw – they believe their superior intelligence, undeniable though it is, enables them to beat the market. The evidence tells us that they can’t. If they themselves are the market, simple arithmetic tells us that only 50% of them can outperform the other 50%. By the time they charge for their services, only around 30% can deliver a better net return than average.

There have been many recent examples of star fund managers falling to earth with a crash, losing significant sums of money for those people who believed their hype. A recent example in the UK was Neil Woodford and in Australia Hamish Douglass.

A mentor of mine, after whom our new office has been named, described an essential element of real financial planning as ‘the patient long-term accumulation of wealth’.

A successful investment strategy involves many different strands. Avoiding unnecessary risk, by diversifying across asset classes, diversifying within asset classes and not investing in anything complex is a robust if somewhat boring approach. It can be compared to the analogy of the hare and the tortoise. While the hare may speed on ahead, the investment tortoise, in the longer run, will often be the winner. In particular, this analogy holds true when markets become uncertain.

Since the great financial crash of 2007, the world’s stock markets have significantly increased in value with only a relatively short number of periods where values have fallen. Even the Covid crisis has seen stock markets power ahead. At some point, markets will take a tumble. A sensibly well-diversified portfolio is likely to perform better than a risky alternative. The ‘patient long-term accumulation of wealth’ recognises that there will be occasions when stock markets fall in value for an extended period of time.

A disciplined approach, to include re-balancing and not panicking, has stood the test of time.

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