Scientific research has shown that risk and return are fundamentally related in the capital markets. However, not all risks in the market are worth taking.
Modern capital markets are brutally competitive. In fact, competition is so feverishly intense that the probability of any one money manager being able to reliably produce market-beating results (after adjusting for risk) diminishes rapidly with time. Research repeatedly shows that it is statistically risky and very costly for investors to try to forecast future market movements or to try to pick which money manager will beat the others in any given upcoming period.
In such hyper-competitive conditions, it becomes very important to manage the costs of any investment strategy. Strategies involving high fees and costs are very likely to underperform on average and over time.
The good news is that with patience and discipline it is possible for investors to increase their chances of achieving long term success by employing strategies based upon maintaining stable and broad portfolio diversification. Studies show that over the long term a portfolio’s broad asset class composition is a much more important factor in determining the investor’s ultimate return than the buying and selling of individual stocks and bonds.
We constantly survey all investments in the market (both ‘passive’ and ‘active’) in search of evidence-based investment strategies to benefit our clients. At present, in the majority of cases, our preferred approach is to employ a process known as strategic asset allocation. This approach enables us to design bespoke portfolios which have a risk and return profile that match the unique needs of a client’s financial plan.
Strategic asset allocation differs markedly from the historically common approach of delegating portfolio management to a highly-paid active discretionary manager. The historic approach suffers from several shortfalls. Studies show that costly active management strategies are likely to underperform on average and over time. In addition, it is more likely that this type of approach will result in portfolios that are poorly aligned with the client’s goals because the money manager has taken on a narrow role of trying to ‘beat the market’, without understanding what the client is actually trying to achieve in their life.
Many clients come to us with a pre-existing investment strategy in place and in these situations we are typically able to realign their holdings over time, within the tax constraints that can arise.