The relentless power of markets
Investing is not a ‘set and forget’ process. Good investing requires one to be open-minded to evolutions in the approach through a constant process of challenge. At our internal Investment Committee meetings, we continuously monitor investment research to identify if there is anything out there that might enhance the experience we deliver, be it risk reducing, performance enhancing, or a combination of the two.
One of the convictions of our philosophy is to accept that stock and bond markets work well, that they reflect all available information and are therefore difficult to outguess – we call this, a systematic approach to investing. This has served investors fantastically well in the recent past, although it was not so long ago that traditional stock picking and market timing strategies were the best thinking available to us – times change.
We continue to monitor the evidence regularly, but the numbers remain firmly in favour of a market led approach to investing. Recent research examines the performance of active managers (i.e., those that do not track an index, unlike ‘passive’ managers) around the globe. One thing we would expect to see if markets fail to price stocks effectively is active managers beginning to consistently outperform their index fund counterparts.
Whilst in the short term, a portion of managers may provide some outperformance – albeit fewer than half across the board in the categories above - one tends to find that the relentless power of markets shines through in the long run.
At the core of our approach sits a portfolio that avoids second guessing market prices, but instead utilises low cost, highly diversified, funds that aim to deliver the market level of return through time with a high degree of certainty. The chart below demonstrates such an approach has led to fantastic outcomes in recent years.
The example shows a set of systematic portfolios compared to a sensible peer group of multi-asset funds one could reasonably have bought off the shelf in the UK. The majority of which, to this day, employ a combination of market timing and stock picking strategies, mostly to their detriment.
Figure 1: Systematic portfolio outcomes have been strong: Jun-11 – Mar-25 | Data source: Albion Strategic Consulting © Multi-manager Comparison Tool. Data to 31/03/2024. See endnote.
It can be tempting at times of uncertainty and volatile markets to want to act, perhaps moving into ‘safety’ until things settle down, or to ‘buy the dip’. The reality is that market falls are expected to happen from time to time and factored into your robust financial plan. The challenge is that the timing and magnitude are unpredictable in nature. As Paul Samuel, famous economist and Nobel Laurette once remarked:
Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.
We will continue to monitor the theory and evidence. For now, riding the ups and downs of markets continues to provide the best chance of investing success. Keep calm, carry on!
