Many of us know that it is important to invest our money wisely so that we can reach our financial goals. These include goals such as retiring comfortably, funding our children’s education, leaving an estate behind for our loved ones, and possibly even contributing towards charitable causes.
But how should we invest our money? There seems to be a huge number of different types of assets which we can invest in, including stocks, bonds, currencies, gold, property, structured notes, options etc. And then there are endless vehicles in which we can invest into these assets as well, such as unit trusts, exchange-traded funds (ETFs), insurance products and so on, with more being created every day. And everyone has a different philosophy. Some say you should buy low and sell high. Others say you should buy high and sell higher. What should you do?
At Providend, if we were to boil down our investment philosophy to just one concept, it would be that is based on evidence.
Our Investment Philosophy
With that in mind, our research has led us to believe that there are three features of a successful investment experience: having the Right Mindset, the Right Portfolio, and the Right Adviser.
Having the Right Investment Mindset
The first step towards successful investing is to have the mindset that your aim is to build long term wealth. Though this may sound obvious, the reality is that many people do things that do not actually help them to build long term wealth. For example, they focus on what the stock market is going to do this year, or next quarter, next week, or even today! As a result, they tend to jump in and out of the markets, trying to predict market highs and lows. However, the evidence tells us that investing for the short term is a loser’s game and that your odds of building long term wealth are greatly increased when you stay invested in a suitably diversified portfolio for ten years or more.
Source: Bloomberg. MSCI All Country World Index. Returns in SGD. Period measured from 1988-2016.
Perhaps the greatest investor of all time, Warren Buffett, put it this way: “Rule no. 1: Never lose money. Rule No.2: Never forget rule No.1.” How might we accomplish this? Well, using data going back to 1988, if you had invested in a global equity portfolio over a ten year period, 90% of the time you would have enjoyed positive returns with the average ten-year holding period return being 5.68% per annum. That’s not bad, but if you had invested for fifteen years, you would have always enjoyed positive returns, with an average fifteen-year holding period return of 5.16% per annum! (This is despite this period featuring two of the largest market crashes in history – the Dot.com bust in 2000 and the Great Financial Crisis of 2008). Investing in a long term mindset clearly has its advantages.
Source: Bloomberg. MSCI All Country World Index. Returns in SGD. Period measured from 1988-2016.
According to a study by Dalbar, as of 31st December 2015, the 30-year average annualized S&P 500 return was 10.35%. However, the average equity mutual fund investor’s annualized return was only 3.66%. The main cause for this underperformance was discovered to be due to investors having a short-term focus and trying to time the market, with average investors seldom staying invested in their funds for more than four years. When you take into account the effects of compounding, the difference is hugely significant. For example, $100,000 compounded at 3.66% per annum over thirty years would have turned into $293,992. At 10.35% per annum, it would have turned into $1,919,420! There’s little doubt that one can retire a lot more comfortable with the latter amount.
So the Right Mindset is one where you aim to give yourself the best odds of investment success, to have the conviction and discipline required to invest for the long term (especially when markets decline!), and to allow the magic of compounding to build long term wealth for you.
Setting up the Right Investment Portfolio
In our opinion, the Right Portfolio is one that is evidence-based. Evidence-based investing makes use of the best evidence that is currently available in the design, implementation and management of the investment portfolio. In order to have the conviction to stay invested for the long term, the Right Portfolio should also have evidence of a strong track record that has lasted across decades. (After all, you’re likely to be investing in it for decades!)
Many investors tend to invest into funds based on their performance over the past few years, thinking that it means that the fund manager has the skill that will allow him to continue to outperform in future. However, studies have shown that the recent performance of top-performing funds is not a good indicator of how well they will perform subsequently. Even professional fund analysis programs such as Morningstar’s popular star rating system have not been found to be able to predict future fund performance with any reliability. This can cause investors to pull out their investments whenever the funds underperform, and reinvest into the next fund that had a good track record in the past few years only for it to underperform subsequently and then repeat the process—paying unnecessary switching fees, feeling emotionally distressed, and continually receiving poor returns on their investments.
Source: S&P Dow Jones Indices. Data as of 30th June, 2017.
It’s no good investing for the long term in a portfolio that consistently underperforms. That’s why at Providend, we use cost-efficient, globally diversified portfolio strategies that have been proven over decades to deliver satisfactory returns to investors over the long term in a risk-adjusted manner. As the saying goes, “If I don’t look busy, it’s because I did it right the first time”. With our evidence-based approach, our clients understand that they can invest once and just sit back and relax thereafter.
The Right Portfolio also has to be the right one for you. It has to be suitable for your unique circumstances in terms of your specific goals, time horizon, and of course your need, ability and willingness to take the risk so that you can always sleep well at night while you are invested.
Finding the Right Adviser
Evidence has also shown that having the Right Adviser to guide you along your financial journey can also help you to achieve better returns than you would attain by yourself. Vanguard estimates that the best practices in wealth management can add about 3% in net returns. Basically, we define the Right Adviser as someone who is honest, independent and competent, and whose interests are totally aligned with yours. The Right Adviser will help you to select and implement the Right Portfolio for your particular needs and goals, and aid you to have the Right Mindset along the journey towards your financial goals.
If you are looking for the Right Adviser whom you can trust to look after your family’s financial needs, it only makes sense to engage an adviser whom you can be certain is incentivized to work for you, rather than for him or herself. We believe that a fee-only business model promotes independence and objectivity, which is why Providend is a fee-only financial advisory firm. In fact, we are Singapore’s first—and probably still the only—fee-only financial advisory firm.
Ultimately, investing is a game of probabilities. You might invest with a short term horizon and try to time the markets by trying to pick market highs and bottoms, and be successful in achieving your financial goals. You might choose a portfolio that has performed well over the past few years that still continues to outperform for many more years. You may find a financial adviser who is incentivized to meet sales targets, and yet recommends cost-effective investment solutions; or find one who has the skill to pick long term outperforming fund managers and consistently time the markets for you to achieve superior performance.
But what are the odds of that happening?
Invest with the Right Mindset, with the Right Portfolio, and with the Right Adviser to guide you along your investment journey, and give yourself the greatest probability of reaching your financial goals and enjoying a successful investment experience.
Invest with Evidence. Invest with Conviction. Invest with Providend.
This is an original article written by Sean Cheng, former Portfolio Manager at Providend, Singapore’s Fee-only Wealth Advisory Firm. The proxy for the global equity portfolio used is the MSCI All Country World Index. Out of twenty ten-year holding periods (e.g. 1988-1997, 1989-1998, and so on), only two of them would have delivered a negative return. The two negative ten-year holding periods were Jan 1999—Dec2008 (-1.07% p.a.) and Jan 2000—Dec2009 (-0.75% p.a.). Source: Bloomberg. Returns in SGD.  Source: Bloomberg. Returns in SGD. There are fifteen fifteen-year periods from 1988-2016.  http://www.northstarfinancial.com/files/6314/6523/9571/2016_DALBAR_Advisor_Edition.pdf  S&P Dow Jones Indices studied 660 funds that were in the top 25% of US equity funds in September 2012—four years later, none of them had remained in the top quartile. https://us.spindices.com/documents/spiva/persistence-scorecard-december-2016.pdf?force_download=true  Investors and financial advisors commonly use Morningstar’s Star rating system to determine top-performing funds. However, research has shown that on average those with more Stars actually tend to perform worse than those with fewer stars in the following years. https://www.vanguard.com/pdf/icrwmf.pdf  https://www.vanguard.com/pdf/ISGQVAA.pdf
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