Investing for success

A recent article I read reminded me of the importance of investors understanding the crucial factors

they need to be aware of when investing money in shares and bonds.

The writer was Robin Bowerman of Vanguard Australia and he reiterated what we here at G3 believe, in that the research behind investing is critical when building an investment portfolio that is going to last.

Many, if not most investors, ask “what return will I get”?  and although this is a valid question, this purely focuses the investor on the return.  Many look at the fund manager ratings, the performance of a particular fund or strategy and how well they know the name of the fund manager in the media.    Unfortunately they overlook some fundamentals such as the risks they are taking unnecessarily  and the costs they are paying in their portfolios.

Year after year, research has shown that the significance of a portfolio’s asset allocation is vital i.e. the proportion of its total assets that are invested in different asset classes of mainly local shares, international shares, property, fixed interest and cash.  This asset allocation

Everyone knows that they should be diversified when it comes investing however, many portfolios we see are diversified to the extent of having a mixture of New Zealand shares and Bonds, a few securities in Australasian markets and if they are really lucky, a few may have some exposure to international markets.  This is not diversification at its best – this is quite concentrated and means the investor has a higher exposure that others who are diversified worldwide.  Australia and New Zealand combined, account for approximately 3% of the world capital markets, which is low, and if you consider New Zealand is approximately 14 times smaller than Apple, this is concentration risk which an investor does not have to take if they diversify on an international scale.

As an example of research, a landmark paper in 1986 “Determinants of portfolio performance” by Gary Brinson, Randolph Hood and Gilbert Beebower, confirmed that a diversified portfolio’s target or strategic allocation is responsible for the vast majority of its return over time i.e. the types of assets you are invested in – NOT the fund manager ratings, focusing on returns only, the picking ‘hot stock’s or ‘timing the market’ approach taken by many active fund managers and advisers.

Trying to time the market have led many investors to sell at a loss when the market was at a low, only to buy back at higher prices when the market has risen.  This goes against buyer behaviours is other areas, such as buying bulk from the supermarket when a product is on offer, or buying property when prices are deflated.

The only free lunch you get with investing is diversification!  Worldwide diversification, investing long term to meet your goals, including a mix all the different asset classes and keeping costs and trading fees low, means looking to the research for how best to invest rather than trying to be a clairvoyant looking into a crystal ball.

As an investor, instead of looking at the things you think you have power over (and really you don’t), focus on what you can control.