Private Client Investment
The starting point of any investment strategy must first be to define the long term needs of you and your family. Only after your financial and emotional needs are clearly understood can an appropriate investment portfolio be selected. In general, our overriding goal is to recommend that you take no more investment risk than is necessary in order to achieve your defined long term objectives.
The key question then becomes, “what strategy should you adopt in order to meet your defined risk/return objectives?”
The financial services industry today is overflowing with many highly talented and highly paid professional money managers eager to take up the challenge. Some managers use ‘market timing’ strategies which seek to buy into the market when it is rising and sell out of the market when it is falling. Others use ‘security selection’ strategies, which rely on hard work and professional talent to spot ‘good’ investments and avoid ‘poor’ ones. Some managers use both types of strategies, or mixes of other strategies including ‘charting’, ‘market sentiment’ or ‘intrinsic value’.
Over the years, the professional investment community has spent a vast amount of money developing state-of-the-art global technology systems to develop and execute optimal investment selection processes and strategies. The financial press is brimming with articles and forecasts written by learned authors, and there is no shortage of marketing materials from City investment managers aimed at convincing you that they can indeed consistently 'get it right'.
There is just one core problem. The overwhelming statistical evidence is that on average, over time, and after costs these types of investment strategy simply don’t work. Over the long term, most fail to produce a return to the investor that is equal even to an average benchmark market return. And those that do produce above-market returns do not seem to do so consistently (market over-performance is at best a short-term phenomenon).
In the investment advice arena, the situation is equally disappointing. Top researchers have been unable to develop a foolproof method to identify in advance which money managers will outperform the market during any given period. Over the long term, trying to select investment managers who can successfully apply these types of strategies yields essentially random results before costs, and below-market results after costs.
Despite the thousands of pieces of advertising literature published each year promoting these investment methodologies, the unavoidable conclusion is that much of the professional money management industry is engaged in fundamentally unproductive activity. For an investor with a long term investment horizon, entrusting one’s wealth to such a strategy is not the best way to ensure long term success.
Faced with the statistical facts, and scarred by the disappointments of previous investment experiences, it is understandable why so many clients seek an alternative.
Fortunately, academically proven solutions do exist. These solutions are based upon the Nobel-prize winning tenets of Modern Portfolio Theory. Rather than consistently trying to fight market efficiency, these solutions harness the underlying power of the capital markets to generate long term success based upon investing in scientifically structured asset class funds.
Modern Portfolio Theory is mathematically complex, however its key conclusions can be easily understood and used by all investors. In particular:
- You should always ask for a higher return before accepting a higher degree of risk.
- There is strong evidence that modern financial markets are 'efficient'. In practical terms, this means that it is virtually impossible for any investment manager to consistently beat the market over the long term by betting on individual shares or securities.
- Modern research shows that it is in fact the structure of the portfolio that is critically important, whilst the individual investments are much less important. You should therefore focus on the overall risk and return of the entire portfolio, and should not be distracted by the individual performance of the components.
- Modern research shows that by diversifying the portfolio across certain asset classes (cash, fixed interest, equities, et cetera) it is possible to put together superior combinations of investments that together will give a higher level of return for each level of risk. The weight given to each asset class is therefore an important factor in structuring the portfolio.
At Fensham Howes, we carefully construct investment portfolios using scientifically structured asset class funds. These funds target strictly defined market risk factors in order to systematically capture the underlying returns of specific aspects of the capital markets. When combined into a single portfolio, an appropriately balanced selection of these funds will on average and over time reliably contribute to you meeting your goals.
You will have better long term prospects for your invested wealth because we do not believe in trying to ‘beat the market’. We work hard to ensure that over the long term you are correctly positioned to be compensated for the structural investment risks that you decide to take, and protected from the risks that are unlikely to provide reliable rewards.
The strong relationship we build with you early in the financial planning process is essential to achieving this goal. One of the most important roles we play is to help you understand and control the behavioural challenges of investing. This is often where we add the greatest value over time. The science of investment is indeed important, but in the final analysis it is the human, subjective element to a successful relationship that is most underestimated by investors when they seek and obtain professional investment advice.
Our entire process is structured to bridge the gap between the scientific and the human elements. We focus on helping you to understand the key differences between investment and speculation, between truly sound advice and merely ‘branded’ advice, and to have the confidence that comes with understanding financially where you are now, where you are going in the future, and why.
Our ongoing communication and relationship management is designed to enhance the knowledge, confidence, and discipline critical to your long-term investment success.