We sometimes refer to the way we invest as mostly being a ‘systematic’ approach.
It is our duty to do what is right for our clients. When investing, we build on a foundation of facts. This is because we believe we would be doing our clients a disservice if we did it any other way.
What do you mean by ‘systematic’ investing?
What we mean by this is that we adopt as much of a disciplined, rules-based, and unemotional approach as possible.
We structure portfolios around long-term strategic allocations to different types of investments. This is instead of trying to second guess short-term market movements and adjust the portfolio accordingly.
Trying to outguess the market might seem like a sensible thing to do. However, the evidence suggests it is exceptionally hard to do persistently.
The basis of our strategy is to pick up the broad market returns on offer in compensation for market risks taken. It also involves rebalancing portfolios back to their original structure regularly as they stray from the original plan.
The funds we use to implement this strategy are usually highly diversified, transparent, and low cost. They are structured to capture exposure to broad market risks. An example of this would be if we want to access smaller companies to capture the higher returns potentially on offer. Our first step would be to find funds with an extremely broad exposure to the small-cap universe.
In a systematic approach, returns mostly come from markets, not from fund manager skill.
What would the opposite of this be?
Active investment management contrasts significantly with systematic investing. Its underlying premise is that a fund manager, using their judgment, can take advantage of short-term forecasts of market or company valuation levels. They do this to try to beat the market.
Unfortunately for them, trading in the markets is a zero-sum game. By this we mean for every winner there must be a loser. Markets also incorporate the latest information efficiently into prices making it difficult to outguess them. Costs for active managers also tend to be much higher than systematic approaches. This is both by way of higher manager fees and the costs associated with buying and selling stocks or bonds.
The consequence of these hurdles is that most active managers fail to deliver on their market-beating promise. Even for those that do, it is hard to distinguish between skill and luck. It is even harder to identify skilled managers for the future.
When it comes to investing beating the market does not matter. Especially when the objective is to build a better future for you and your family. Competing to win in this context, whether by running after a new investment tip or trying to guess the market, often only results in costly losses.