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Our approach to investing is based on a fundamental set of beliefs. We are guided by these beliefs and have based our approach to investment markets on the following:
- Start with knowing yourself.
First, a RISK assessment. Accept that you must take on a certain level of uncertainty to achieve better long term results. Know how much risk you can live with and make sure your portfolio aligns with this. Typical guiding factors are age - the older you are the less risk is generally acceptable. Also to be considered, the extent to which you need to take on risk. If you are behind in your target savings – then perhaps you ramp up the risk to make up for lost time. If you're well on track you can dial down the risk as you just don't need to stick your neck out. Second, a realistic expectation of RETURNS. Typical returns in the 1980's through to the 'Tech' market run up in the late 90's were in the 15% per year range. This created expectations well detached from what is sustainable. Author and Professor Jeremy Siegel, in his book Stocks for the Long Run, shows that 7% annual returns have been the standard for the past two centuries and he cautions that "future real returns on stocks could be 1-2 percentage points lower". Don't disappoint yourself with unrealistic expectations. And don't forget the ongoing aspect of investing that is a major determinant of long term success – REBALANCING. This simply allows investors to pare back holdings that have moved up rapidly and thus keep their desired allocation intact. While it seems counter-intuitive to take money from sectors that are working, and put it in sectors that are not working, you must view this as a long term strategy of selling high and buying low. And rebalancing does not mean some pre-determined interval and automating the decision. It should be done with some view of current conditions and the need to rebalance should be assessed at every review with your Advisor.
- It's 'time in the markets, not timing the markets, that counts'.
There's plenty of advice about the hot stocks to buy and the quick buck approaches that will lead you financial success. And it plays to the sheer appeal to try and time things. It's a rush! Most times this advice is dead wrong. And it's no way to save for your future. Dalbar, a prominent financial services consultant, found that from 1984 to 2000, the returns of the broad S&P 500 averaged 16.2% year. But the average stock fund investor had an annualized return of 5.32%. The reason? Active trading. Trying to time the market. To time the market you must be right when you sell and right when you buy and this must be repeated over and over. It won't happen.
- Stocks, Funds or Indexing?
It's a lot harder to find a stellar stock than a diversified fund. Funds give us the diversification we need (see below) and give us plenty of ways to view the history. Everyday we can find compelling analysis that tell us to buy a certain stock. It usually takes little time to find compelling reasons to sell the same stock. Opinion is divergent, more often than not. What do you believe? We believe that a sizable bet on a stock is a risky proposition – and no way to approach your future. As for the case of indexing versus managed funds? The merits of indexing derive from the abundance of badly managed, or overpriced (or both) funds. The good ones exist and have been consistent in delivering value. Too bad this story is so boring. But it is the way to plan your future.
- Diversify, Diversify.
Spread your assets between different classes of investments that don't move in tandem. And today, the new mantra is diversification between products with different features. Some flexible, some guaranteed. Give yourself plenty of options. This is how to mitigate risk. Here are three tenets that have stood the test of time: i) Stocks beat bonds, bonds beat cash ii) Small stocks beat large stocks iii) Value beats Growth