a long-haul race
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