a long-haul race

The Scotsman - - Farming -

pri­vate in­vestors act with the long term in mind, in­stead they fre­quently turn over their port­fo­lio, buy­ing high and sell­ing low, be­cause they seem to be ob­sessed with short-term per­for­mance.

These short-term per­for­mance chasers tend to be emo­tional and im­pul­sive. When in­vest­ment ben­e­fits are not seen im­me­di­ately, they get frus­trated and switch man­agers and/or in­vest­ment strate­gies. The prob­lem is that short-term per­for­mance chas­ing tends to lead to un­der­per­for­mance, due in part to the deal­ing costs that these reg­u­lar changes in­cur.

This trend of switch­ing funds at the “wrong” time ex­plains why, over 20 years to De­cem­ber 2009, the av­er­age pri­vate in­vestor has only achieved a re­turn of 3.2 per cent per an­num, barely beat­ing in­fla­tion, whereas the UK eq­uity mar­ket has risen by an av­er­age of 8.8 per cent per an­num. It only goes to prove that short-term per­for­mance is due more to good luck than good judge­ment. As­set al­lo­ca­tion is still the largest con­trib­u­tor to in­vest­ment per­for­mance within a port­fo­lio. This the­ory, known as Mod­ern Port­fo­lio The­ory, holds true to­day as much as it did when Harry Markowitz pub­lished his orig­i­nal paper in the Amer­i­can Jour­nal of Fi­nance in 1952. He was sub­se­quently awarded a No­bel prize for Eco­nom­ics.

Ray­mond El­lis is di­rec­tor of Scott-Mon­crieff Wealth Man­age­ment Given the case study sub­jects’ youth, rel­a­tive wealth and their will­ing­ness to take a spec­u­la­tive ap­proach and to in­vest for the longer term, a port­fo­lio in­vest­ing pre­dom­i­nantly in growth as­sets (shares and prop­erty) is most ap­pro­pri­ate.

How­ever, the cou­ple’s in­ex­pe­ri­ence in in­vest­ment mat­ters and the fact that they are also risk­ing cap­i­tal in their busi­ness should be taken into ac­count, as should the likely con­tin­ued un­cer­tainty and volatil­ity in cap­i­tal mar­kets.

A core hold­ing of 40 per cent split equally be­tween a global, multi-as­set man­aged port­fo­lio, (7IM AAP Ad­ven­tur­ous Fund) and a global, multi-as­set ab­so­lute The cur­rent year has again seen a high level of volatil­ity in eq­uity mar­kets, with a sharp fall in mar­kets gen­er­ally in the sec­ond quar­ter as con­cerns re­gard­ing sov­er­eign debt, fal­ter­ing global growth and per­sis­tently higher than ex­pected in­fla­tion lev­els con­tin­ued to un­der­mine in­vestor con­fi­dence.

We broadly po­si­tioned the port­fo­lio to be heav­ily weighted to eq­ui­ties, with lit­tle ex­po­sure to govern­ment or cor­po­rate bonds, but we re­tained a sig­nif­i­cant po­si­tion in the ab­so­lute re­turn sec­tor, an­tic­i­pat­ing that con­tin­u­ing volatil­ity of­fers op­por­tu­ni­ties to add value and that other fac­tors, such as cur­rency move­ments, would play an in­creas­ingly im­por­tant role in highly-cor­re­lated eq­uity mar­kets.

We re­main largely com­mit­ted to the same strat­egy but with the yield on, for ex­am­ple, UK stocks hov­er­ing around tenyear gilt yields, the out­look for eq­uity mar­kets looks even more promis­ing. As ever, it is gaug­ing the tim­ing of re­newed in­vestor con­fi­dence that is crit­i­cal.

Chop­ping and chang­ing tac­tics rarely pays off in the long run

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