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We adopted our current investment approach more than 20 years ago and while we have made a few tweaks to it over that period, the fundamental approach has remained unchanged.  While we remain open to robust research that offers a reliably superior outcome, we have yet to see one.

Our strategy is simple and can be likened to taking a blended whisky and then diluting it according to your individual preference.  In a portfolio the whisky element is represented by a blend of liquid equity assets which aims to provide the inflation-beating growth over the portfolio’s lifetime while the water is represented by defensive assets such as high quality short-term fixed interest holdings.

While a portfolio valuation comprising many pages of individual holdings can look impressive, true diversification is a reflection of the spread of underlying holdings rather than the number of line items on a quarterly valuation.  In fact most of our models generally consist of only five funds and it would probably be possible to reduce this to even fewer.  In fact for those which we don’t manage, we frequently employ just one or two funds.

Despite the small number of individual funds, those portfolios have exposure to thousands of companies in dozens of countries around the world so even if one of them fails spectacularly, as happens from time to time, the impact should be relatively insignificant.

For some people this approach to investment might be considered boring or even dull.  The popular image of investing tends to be driven by dramas like ‘Wall Street’, ‘The Big Short’ or ‘Trading Places’, in which participants place their trades amid much shouting and frantic activity.  However our office never resembles the trading room in the film ‘Wall Street’, let alone that in the ‘Wolf of Wall Street’.  I have seen actual trading departments in action and the scene was so much less exciting than any of them, even though having a bank of six monitors above each desk does look pretty impressive.  In fact it was quieter than most regular offices, which probably explains why they were not sequestered in a soundproof area.

So let’s look at the benefits of being boring when it comes to investing.

• Reduced emotion – Whether as professionals or private investors, we are all humans and accordingly are susceptible to being influenced by both our own internal biases and external stimuli. While these are useful in some situations, investing is not one of them and being able to maintain detachment reduces the risk of making hasty decisions on the basis of news or some other noise.
• Better risk management – Risk and return are closely related but not all risks are compensated for with an associated expected return. Having a framework to ensure that only compensated risks are being taken reduces the incidence of unpleasant surprises in the future and unpleasant surprises are the sort of things that are more likely to derail you and cause you to ditch the portfolio.
• Consistency – Adopting a robust strategy at outset and then maintaining it throughout changing economic conditions avoids being dragged from one approach to another according to the wind direction.
• Driven by financial planning – We only construct a portfolio after working with our clients to build their long-term financial plan which takes into account their objectives, assets, liabilities, income and expenditure. This provides a framework into which the portfolio can fit so that it is positioned to help them achieve those goals at an appropriate level of risk for them.
• Cost control – Financial services regulators have recently become greatly exercised by costs but we have been focusing on them for decades. Every pound that investors pay in costs is one that is not available to meet their own needs and so we seek to minimise them as far as possible.  It is often much easier to improve net returns by reducing costs than by increasing gross returns and it is certainly less risky for the investor.
• Better investor behaviour – Sadly, many investors are their own worst enemy as they switch between flavour of the month assets at the least effective times, incurring unnecessary transaction costs and taxes as they do so and jeopardising their future financial security. By taking the time to help them understand how they can make the markets work for them, we can help our clients to make better decisions and resist the temptation to tinker with their portfolio.
• The outcome of all this is not necessarily the highest return in any given year (it probably won’t ever be) but over the sort of prolonged period over which investment is best undertaken – years and preferably decades – it can lead to a higher return and to a less stressful experience. This is certainly not guaranteed but adopting a discipline based on robust academic research, minimising variables which do not add value and keeping costs under control works better for us than assuming that we are smarter than all the other market participants.

However, you may feel that the boring approach is not for you.  We do not, for example, include such exotica as cryptocurrencies, non-fungible tokens (NFTs) or precious metals in our clients’ portfolios.  This is not because we have some inherent objection to new ideas but because we have yet to see persuasive evidence that any of them provides a demonstrable benefit compared to the assets which they would displace were we to include them.  We frequently reject innovative ‘investment opportunities’ that come across our desks and on more than one occasion we have seen them fail spectacularly not long afterwards (Arch Cru [1] and Connaught Income Fund[2] are just two of which the author had personal experience).

Just because such an opportunity is all over the media and everyone is talking about it does not make it a good investment, particularly as much of the noise may be coming from those trying to persuade others to buy it.  NFTs are a case in point.  While some market participants undoubtedly made money from selling a record of ownership of an electronic image file for the equivalent of thousands (or even millions) of dollars, their buyers rapidly found that the secondary market for selling them to someone else turned out to be rather limited.  There just weren’t that many ‘greater fools’ to pay more for a digital pet rock [3](honestly, I’m not making this up) than the original buyer did.

We all like to feel that we are making smart decisions and it’s very easy to be persuaded of this because our peers are apparently doing something, even if they are people we don’t know.  Record-breaking fraudster Bernie Madoff built much of his in attracting new investors on this despite questions being asked about the credibility of his purported returns and he even fooled some high profile professionals [4]who really should have dug a little deeper before committing their clients’ capital.  Now we have ‘influencers’ with no required professional qualifications or experience to pull in the gullible, although it is encouraging that some are now being held to account for their actions[5].

Admittedly it is difficult to make a good your friends or followers out of holding a diversified global portfolio and barely changing it when someone else has just made a big killing (or at least says they have) in a matter of days or weeks by correctly predicting the future and making investment decisions based on their predictions.

And yet there is a mountain of evidence, published in credible journals, which shows that trading always adds cost and that cost is only rarely outweighed by any value added by the process.  It is reasonable to expect (particularly as years of exposure to the output of marketing departments has conditioned us to believe it) that smart people can outperform the market by making decisions on the right things to buy and sell at the right times.  The problem (which the evidence reveals starkly) is that since the smart people – , who can be lucky just as easily – are the market, so it’s really hard for them to achieve any outperformance other than by random chance.  And that means that underperformance is just as likely.

Actually it is worse – in many fields, there is a relationship between cost and quality of product.  Spend £270 on a Montblanc pen and you expect to get a better product than if you bought 50 disposable biros for £10.  Spend £330,000 on a Rolls Royce Spectre and you expect a better ride than an £8,000 Citroen Ami (and you’ll be able to tell which end is the front).  In the field of investment though, the opposite is often true and as Vanguard founder John Bogle said, ‘In investing, you get what you don’t pay for’.  Every pound that goes into someone else’s pocket isn’t available for meeting your goals so keeping costs under control is a vital discipline.  It’s just not going to get most people interested if you rave about having shaved 15 basis points off your annual costs.  But all those costs add up and they apply regardless of how well your investment performed.

If you find that the way you are investing is exciting, then maybe you’re doing it wrong.

This article is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.  Your capital is at risk when investing.  Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance.

[1] https://www.fca.org.uk/news/press-releases/%C2%A331m-compensation-be-paid-out-following-fca%E2%80%99s-arch-cru-consumer-redress-scheme

[2] https://www.ftadviser.com/regulation/2020/12/18/connaught-operator-to-pay-investors-after-avoiding-10m-fine/

[3] https://gizmodo.com/people-are-shelling-out-six-figures-for-nft-rocks-1847508926

[4] https://www.theatlantic.com/business/archive/2008/12/horlick-apos-s-memory-hole/4481/

[5] https://moneyweek.com/investments/fca-finfluencers-charged-love-island-stars

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