DIY Investor Magazine
/
2015 Issue
34
Ever more people are taking charge of their financial
futures – to invest for their later years, exploit the new
pension freedoms, or simply to grow their wealth to
keep up with rising house prices, school fees, and the
like. With cash interest rarely, or barely, beating inflation
that means investing in shares and bonds.
Where to start? Trust in financial services has never
been lower, with many treating professional advisers
with suspicion. Yet taking a DIY approach can be a
daunting prospect. Happily, there is a straightforward
yet powerful strategy that squares this circle – passive
investing with Exchange Traded Funds (ETFs).
ACTIVE MANAGERS DON’T BEAT THE MARKET
ETFs make investing simple, cheap, and effective, even
compared to more expensive and seemingly more
sophisticated options. It might feel counter intuitive, but
there’s a case against using professional active fund
managers to invest in the markets. Indeed, several
decades of academic research has shown the majority
of fund managers do not beat their benchmarks.
Dominique Riedl,
founder and CEO of justETF, explains why he thinks ETFs are the right choice for
DIY investors and explains how his platform can assist in selecting the right products to build and
maintain a balanced investment portfolio.
ETF PORTFOLIO
INVESTING MADE SIMPLE
As a group, active managers failed to protect investors
in the 2008 stock market crash, and they’ve failed
to match the subsequent recovery. Seeking market-
beating out performance was always futile, because
active managers are the market. If 50% of actively
invested money beats the market in one year, then 50%
must lose to make that possible.
Active investing can therefore be a zero sum game, and
all the hype about clever managers providing an edge
could be just that. The other issue is their high fees. At
most 10-20% of managers might beat the market long-
term, yet 100% charge higher fees. In that respect it is
pointless paying for a market-beating performance only
to get a worse than average result.
AN ALL-ETF PORTFOLIO – THE BEST SOLUTION
FOR MOST INVESTORS
This is where ETFs come in; because it’s so hard
to beat the market, it makes more sense not to try.
Instead, invest as cheaply as possible using index-
tracking funds that aim to secure the market return.
As well as shares, ETFs provide market-replicating
access to bonds, commodities, real estate and money
market funds. This means you can combine different
ETFs to create a multi-asset portfolio that mirrors a
sophisticated wealth management approach at a
fraction of the cost.
Trading and running costs are low, so your ETF
portfolio has the strong probability of outperforming
expensive and sophisticated offerings that aim to do
more, cost more, and ultimately fail their investors.
THE ETF ADVANTAGE
US author Rick Ferri has published a white paper
comparing an all-index tracking portfolio with one
comprised of active mutual funds. He found the index
fund portfolio beat the active one 90% of the time, and
that this probability rose as time went on.
Fig 1 justETF ETF Selector
RECENT VOLATILITY HAS SHOWN PORTFOLIO
MONITORING IS VITAL
