How to Simplify Investing and Achieve Success – Part Two

By Robert Wilcocks | Blog

Sep 06

Earlier this week when we shared part one of how to simplify investing we looked at the growth of £1 over the last 50 years relative to several asset classes, including cash, the FTSE all share, and inflation.

Let’s take a closer look at the FTSE all share returns. Viewing this chart, I ask you, “Where is the risk in owning equities?”. Surely the answer is, the risk is in not owning equities – assuming you have a long term investing horizon – right?

The trouble is that there’s always an abundance of seemingly logical reasons to sell. For instance, this chart displaying a long bull run simultaneously demonstrates the folly of not investing due to the 257% gain/return, whilst highlighting how many lay investors find investing scary due to the abundance of news and press articles depicting reasons to sell. One morning during the Iraq war I recall a headline on Bloomberg that read something like, “Iraq Invaded, Oil Prices Fall”. By the afternoon the headline was, “Iraq Invaded, Oil Prices Remain Stable”. The key lesson here is that the stock market goes up and down! And if the price is moving up and down after the event, firstly it is hard to try and time that, and secondly, the event itself can’t be that important. The difficulty that speculative investors have, such as hedge funds and day traders, is that they base their strategy and value (i.e. fees) on being active – there are probably a hundred logical reasons to trade/sell/not invest, every single day. In my opinion, this opens them up to confirmation bias as they look for reasons to buy and sell. As we have just seen, this is very difficult to get right consistently. And each time you trade you A) incur trade costs and invariably B) have to be right twice, every time to make it worthwhile.

Ultimately, if you are always looking for reasons to trade (consciously and subconsciously) you will likely act, and certainly incur costs, more often than necessary. Speculation can yield high returns, but it is a dangerous game to play – you need to be right twice every time you trade to make it worthwhile. On the whole, a “do nothing” buy and hold strategy in the context of an investment portfolio that is built to deliver a return to meet your financial goals is a more sensible strategy. Yet it is often harder to do.

Perhaps worse than speculating, you might find reasons NOT to invest. Being out of the market and missing upside can spiral into a vicious cycle of negative emotions, which can easily result (and too often does result) in missing the long term returns the market offers. This can be catastrophic. These are returns most people need in order to meet their financial goals. If this sounds like you in the past, remember that old sage Sir Buffett: “The best time to plant a tree was twenty years ago. The second best time is today”.

To summarise, there are, of course, numerous risks in investing, be it owning equities or any other asset class like property. Although past performance is indeed no guarantee of future returns, equities over the long term have proven that all falls are temporary, the advance is permanent. So has property, and fixed interest.

I therefore personally prefer equities as they have proven on average to be the best asset class to invest in over the long term. And I invest over the long term, sticking to a plan. As do my clients.

I like to call crashes “fire sales” because “crashes” are in fact when you can pick up great companies cheaply. It’s a bit like going to the Ferrari garage and there is a big sale on classic Ferrari’s. If I have the money and like Ferrari’s, and I know that over the long term the asset is going to increase in value, why wouldn’t I buy the Ferrari? If I’m worried about nuclear war and one day at the supermarket all canned food is 75% off, why wouldn’t I stock up and buy lots of tinned food?

Why don’t people buy more equities when they are cheap? Why do people, in fact, do the exact opposite of this and buy at highs and sell at lows? One word: Emotion.

Market crashes are therefore simultaneously the best and worst time to be an investor. The best in the sense you can get a great deal if you can keep your emotions in check, and the worst, because it feels, well, the worst. Market crashes aren’t a walk in the park. But the systems and processes (or advisers) you have in place at these times of market turmoil are precisely where the greatest part of your investment lifetime lies.

Sometimes, like in the Global Financial Crisis of 2008, you can buy companies extremely cheaply, because the market has been driven down by emotion. But as long as you invest over the long term and have sensible strategies in place, it is always a good time to save and invest for your future.

I thought for further reading you might like to read our investment philosophy document ‘A more sensible way to invest’, see here. Alternatively, please get in touch to discuss any queries or concerns you may have in relation to investing your portfolio.