DIY Investor Magazine
/
March 2016
28
LONG RUN RETURNS.
Real assets (e.g. equities / property) usually outperform
cash and bonds over the long run. The Barclays Equity
Gilt study shows that in 9 of that of the last 11 ten year
periods analysed 2004 – 2014, 1994 – 2004 etc.
Equities beat bonds (but of course that means in 2 of
them they didn’t!)
A key point is that asset allocation, how much you
invest in bonds vs. equities for example, has been
shown to be by far the biggest driver of long term
returns and is far more important than which equity you
are invested in. Using index funds to get access to a
range of asset classes is a sound strategy.
Academic research into the performance track
records of active funds bolsters the case for passive
investing. An analysis of past performance figures
concludes that, although some active fund managers
appear to possess skill, the average active fund
typically underperforms the market. Even the most
skilful investors struggle to produce consistent
outperformance.
And the time, effort and therefore cost
that would be required to select these managers (in
advance of any hoped for outperformance) is probably
greater than the extra return anyway!
INVESTING IS NOT AN ART - IT IS A SCIENCE.
Investing needs a clear long term objective based on
understanding the risk and returns you are seeking.
Then you need to use the key rules of investing to help
you achieve your goals:
•
Get the right mix of assets to meet your needs
•
Diversify
•
Rebalance (keep your asset mix on track by
checking it as the environment changes)
•
Mitigate the risks, where possible
Index or passive funds are an excellent low cost way to
achieve broad diversification within an asset class at
low cost.
Combining index funds into a portfolio tailored to meet
your needs – by using perhaps 10 or so index funds
or simple ETFs – is a great way to invest for the long
term.
And stands more chance of making you, rather
than the financial services industry rich!
ONE OF THE BIGGEST RISKS THAT LONG TERM
INVESTORS FACE IS COST. EVERY POUND THAT
IS TAKEN FROM YOUR INVESTMENT IN COSTS OR
CHARGES IS LOST FOREVER.
