You’re Being Fooled Into Overpaying For Underperformance – Here’s How

When people ask me what I do, I tell them I’m in the business of helping people make money. The business we’re really in though, is helping improve the lives of our clients. It comes from the belief that life is about more than money. I believe money is an enabler – it provides us with options, choice, and flexibility. So if we can help our clients preserve and build their financial wealth, we can help them live a more meaningful and fulfilled life – a life that is truly rich.

Sadly, most people never achieve a life that is truly meaningful and fulfilling – true wealth. Why? Because they’re focused on the scoreboard, and not the process. They’re focused on chasing the money.

Enter the world of investments, stock brokers, financial advisers, fund managers, and high flying financial institutions. If you’re not careful, you might be sailing toward financial freedom with a hole in the bottom of your boat. That hole, is in fact lining the pockets of those purporting to be helping you sail toward the sunset.

When was the last time you looked at your superannuation or investment portfolio statement? Your portfolio has probably grown, especially over the last ten years, so you haven’t taken too much notice. The real question is, how much have you left on the table?

Australians have around $2 trillion sitting in superannuation, which has attracted fund managers like bees around a honey pot. And Australian are paying some of the highest fees for the management and oversight of this money. In fact, last year, Australian’s paid $31 billion in superannuation fees – totaling around $230 billion in the last decade.

So what can you do about it? Here are three things to consider:

1. Fund Fees

When it comes to truly understanding the cost of your investments, it’s hard enough for the professionals to do, let alone the general public. There are many hidden costs that lie beneath the surface – here they are (average):

1. Expense ratio – 0.90% pa

This covers marketing and distribution cost, as well as the management of the portfolio. Typically, this is the only fee investors are aware of.

2. Transaction costs – 1.44% pa

Typically investment managers buy and sell frequently. And with these transactions comes transaction fees. There are three types of transaction costs: 1) brokerage, 2) market impact, and 3) spread.

3. Cash drag – 0.83% pa

This is the portion of your portfolio that is invested in cash. It hurts your return over the long-term because of the missed opportunities in the market.

5. Taxes – 1.00% pa

When you by into a fund, sometimes you’re being taxed for other investors’ gains.

The total of these fees can be as high as 4.17% pa. Although on face value these fees don’t seem high at all, when you compound these costs over long periods of time, it will blow your mind. The above list didn’t even include performance fees!

Here’s what happens when you invest $100,000 into the market with a 7% pa return. The compounding value over 50 years is almost $3,000,000! Let’s start deducting some fees from this return – here’s what you’re left with when you take 1% and 2% in fees:

Even a small number like 2%, compounded over a long period of time, can lead to financial ruin. Jack Bogle, the founder of Vanguard once said:

You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return!

2. Chasing Performance

Forget fees. Just invest in the top performing funds, or sell before the market falls and buy before the market rises (market timing). Easier said that done.

A) Chasing the top performers

Over the last 15 years, almost 80% of all Australian fund managers have failed to beat the broad Australian share index. And after 15 years, only 56% of Australian find managers survived.

Over the last 15 years, almost 90% of all international fund managers failed to beat the broad international share index. And after 15 years, only 46% of international fund managers survived.

B) Timing the market

Researchers Richard Bauer and Julie Dahlquist examined more than a million market-timing sequences from 1926 to 1999. Their research concluded that by just holding the broad market index outperformed more than 80% of market-timing strategies.

Clearly, neither of these strategies put the odds firmly in your favour. In fact, they’re akin to gambling more than anything. Making money in the markets is tough. So if you can’t beat the market by hiring the best, what to the the real experts recommend you do?

3. The Advice

Making money in the markets is tough. The brilliant trader and investor Bernard Baruch put it well when he said:

If you are ready to give up everything else and study the whole industry and background of the market and all principal companies whose stocks are on the board as carefully as a medical student studies anatomy – if you can do all that and in addition you have the cool nerves of a gambler, the sixth sense of a clairvoyant and the courage of a lion, you have a ghost of a chance.

Jack Bogle says understand that what appears to be success in financial markets could just be dumb luck:

If you pack 1,024 gorillas in a gymnasium and teach them each to flip a coin, one of them will flip heads ten times in a row. Most would call that luck, but when it happens in the fund business, we call him a genius!

Warren Buffett wrote this in his 2013 letter to Berkshire Hathaway shareholders:

My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers

He even made a bet in 2008 and put his money where his mouth was. You can read my note about it here.

It’s super important to know that not all costs are bad. The right financial adviser can help you make better decisions over the long-term to save you money. Vanguard recently published a study to help quantify the value of a good adviser.

1. Suitable asset allocation – 0.75% pa

2. Cost effective implementation – 0.70% pa

3. Rebalancing portfolio – 0.37% pa

4. Behavioural coaching – 1.50% pa

Total – 3.32% pa of value added

This does not include any other benefits or value of a good financial adviser, such as strategic and structural advice. Compound that and see what your portfolio looks like.

Next time you pick up your investment portfolio statement, think twice about what you’re doing. Are you 100% sure the financial odds are firmly in your favour? Fees are the silent killer in your portfolio, and only a handful of funds beat the market consistently and over the long-term, and much of this can be attributed to randomness.

Being in the market, while minimising costs, can empower you to getting the real financial freedom you deserve.

Source: Forbes – The real cost of owning a mutual fund 2011, Visual Capitalist, Vanguard, SPIVA, Berkshire Hathaway Shareholder Letter 2013

A Bear Market is Just Around The Corner (or is it?)

You’d be totally forgiven for thinking no more of what a bad economy and market looks and feels like. I mean, how could you not?

Consumer confidence is the highest it’s been for a number of years, and well ahead of GFC lows:

Australia Consumer Confidence

We’re spending more:

Australia Consumer Spending

We’re saving less:

Australia Household Saving Ratio

We’re earning more money since the GFC:

Australia Average Weekly Wages

And of course, the stock market…say no more:

World stock markets continue to make all time highs. The current bull market (as defined as a 20%+ increase in the market) has lasted 3,255 days, which in fact is the second longest on record behind the 4,494 day bull market that ran from late 1987 through to the early 2000. The market climbed 13 years without a single decline of 20% or more.

If this bull market was going to topple the record of the 1987 bull market, we’d see our stock market continue to climb until the 19th of June 2021. Hard to imagine right? It’s not as if it hasn’t happened before!

Here’s a chart of both bull and bear markets since 1926. It shows the number of days both bull and bear markets have lasted. A couple of things to note: 1) Bull markets last longer than bear markets (I mean, a lot longer!) – the average bull market has lasted 981 days, and the average bear market has lasted 296 days, and 2) Bull/bear market cycles have been lasting longer since WW2.

Source: BIG

Let’s dig a little deeper into the post WW2 period. The chart below shows all the bull (in green) and bear (in red) markets, when they started, ended, the percentage change, and number of days they lasted. The average bull market was up 152.4% and lasted 1,651 days, with the average bear market falling 31.8% and lasting 362 days.

Source: BIG

Meanwhile, pundits have been calling for the mark top since 2012. I want you to read these comments, seriously, read them. And next time you hear or see another attention grabbing headline about the market, I want you to recall this post. Here’s a summary of the commentary since (click for larger image):

Market All Time Highs (ATH) doesn’t necessarily mean the market will crash. Here are the number of ATHs each year since 1929. The year 1995 set the record with 77 ATHs, 1964 recording 65, and 2017 notching up 62. The year 2017 is sitting in third place with the number of ATHs in any given year. Presently, the year 2018 is in 27th place, with four months to go in the year – anything could happen.

No one knows how long this market will continue to run hot. No one knows when the market will collapse either.

What you can and should do however, is design your portfolio as if the market will collapse tomorrow. Because someday, maybe sooner rather than later, the market will collapse tomorrow. And you will exhibit precisely the same behaviour as you did in 2008. You will have forgotten how you behaved, however you will remember exactly how it felt. Your human mind will switch to ‘fight-or-flight’ mode, and you will either destroy a lifetime of savings, or you could create a lifetime of savings – the choice is yours.

As long as the music keeps playing, we’ll all continue to dance, until it stops.

The Most Expensive Game of Golf You’ve Ever Played

Last week I wrote an article on investing following a speeding infringement. I received quite a number of positive responses to this note – thank you. I also received a number of questions on the concept I talked about in my blog, that is, compound interest and market timing. I touched on this topic a little while back, but let me give it another go.

Have you ever played golf and placed a bet on each hole? You know, everyone places a small amount of money on each hole, and the winner on each hole takes the lot? Pretty simple, and a bit of fun. Have you ever played this game whilst doubling the amount of money you bet on each hole? Not a big deal…start with 10 cents a hole, and double this amount for 18 holes. Any idea what the number is on the 18th hole? Before reading any further, just take a guess, quickly, don’t take too long!

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$13,107.20! Ridiculous, right!?

How on earth does this happen I hear you ask? Here’s the above table in a chart.

Notice how nothing happens for a long time, the all of a sudden, BOOM, the amount explodes. This my friends is compound investing – the eighth wonder of the world.

If you think that all you need to know is which way the stock market is going in order to make money, think again. Talk to any successful business owner or investor, it’s more about being disciplined, having a game plan, and taking the long view.

Meet John – he’s the world’s greatest stock picker. He only buys when the stock market index is trading at 52-week lows, and assuming they are 17% below his last purchase. Meet Jane – she’s the world’s worst stock picker. She invests $2,000 only at market peaks beginning in 1970, when she’s 22 years of age. She increases her investment by $2,000 per decade – $4,000 per year during the 80’s, $6,000 a year during the 90’s etc. She retires at age 65.

The results? Hands down winner is John, right? The results of this experiment (thanks to Ben Carlson) may surprise you. John does quite well, as you would expect. But the results are very similar. You’d think John’s portfolio would be multiples of Jane’s as he was buying at market lows, and Jane at market highs, however this is not the case. Why? Compound interest.

Jump on any online calculator and calculate the capitalised interest on a 30 year loan. It’s okay, I’ve done for you. A $500,000 loan, with an interest rate of 5%, accumulates interest of $966,279.60. Think about that for a second – that’s only the interest. Imagine compounding capital and interest on your stock investment! The reason John misses out on the benefit of compounding, is because he’s out of the market for long periods of time. Carlson clearly states in his analysis, “Short-term moves in and out of the market don’t matter nearly as much if you have a long-time horizon. Thinking long-term increases your probability for success in the stock market while the day-to-day noise gets drowned out by discipline and compound interest.”

The strategy is so simple, requires no insight into the future, yet it is so powerful, and actually exists – unlike the perfect market timer. The catch? It takes a long time, and it’s b-o-r-i-n-g! The irony is however, that the group of people who have the greatest capacity to absorb the market’s volatility, are the same group of people who seem to be the least interested in it.

We’re Headed For Another Recession & You Have No Idea What Will Happen

Daniel Kahneman once said,

“The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.”

As investors, in fact as human beings, we’re constantly fighting the last war. In other words, we overweight recent events when we make judgment on the probability of an uncertain future event. We simply extrapolate the most recent event indefinitely into the future.

Think about the most recent economic decline, investors we’re running for the exits with the view that the ‘things we’re going to get worse’. The financial crisis of 2007/2008 was one of the most painful experiences in almost a century, yet it only lasted 18 months. I know plenty of investors who retreated at possibly the worst time, and were left hanging out to dry after the market bounced off the bottom, waiting for ‘the right time to get back in’.

Contrast this to how the market has been performing since the bottom of the GFC (March 2009), we have witnessed one of the longest recoveries in history, as illustrated in the chart below. This is probably one of my favourite charts – Bull markets since 1950 in measure in both duration and magnitude.

I know plenty of investors who have either bought back in after they had sold out at the worst time, or have been redeploying cash because they believe the market will continue it’s stellar performance.

Source: Yahoo Finance

Investor’s not only extrapolate the most recent events, but also try to plan ahead for the next GFC and how they’re going to deal with it, and it causes investors to shift their tolerance for risk at precisely the wrong time. If  you’re worried about a 10% correction in the stock market, stocks are not a place for you. Unfortunately for investors, no two market cycles are ever quite the same, so studying the last crisis is unlikely to prepare you for the next. Studying how you behaved during the last crisis on the other hand, may be quite beneficial.

Financial markets never follow the exact same route more than once, yet human behaviour follows precisely the same route, each and every time. Here’s a great, simple 30 minute animated video by Ray Dalio, on how the economy works. It’s probably one of the best videos on the economy I’ve seen.

The timing, the impact, and the duration of recessions are all different. Here is every US recession going back to the Great Depression along with the corresponding stock market performance.

 

Source: National Bureau of Economic Research, Ben Carlson

Even if you knew when the next recession was going to hit, the duration, and the impact it would have on the economy, it’s unlikely you would be able to profit from it. The stock market’s performance during each of these recessions would surprise most investors. This is one of the reasons why you can’t ‘wait for things to get better’ before investing – the stock market is a forward looking machine, not backward.

On average the stock market:

  • Has been up during a recession
  • Has been up 6 months prior to a recession
  • Has returned over 20%, 12 months after a recession has ended
  • Has returned over 52%, 3 years after a recession has ended
  • Has returned over 85%, 5 years after a recession has ended

By the way, we don’t need a crisis or a recession to see the stock market go down. Here’s 13 instances where the stock market has fallen 10% or more without a recession:

Source: Stocks for the Long Run, Ben Carlson

Paul Samuelson once said,

“The stock market has predicted nine out of the last five recessions.”

Next time you find yourself captivated by the alarming predictions made by the guy or gal on the television, in the paper or on Twitter, please remember this: More money is lost in trying to anticipate a collapse in the stock market than the collapse itself.

30 Facts About The Stock Market

My son turned 4 years of age the other week and it was a weekend full of parties and eating. One of my son’s favourite toy is Lego. His imagination and creativity runs wild. I’m one of those dad’s that keeps the instruction manuals in a folder – I mean c’mon, how else will you know how to build the original toy Lego had designed with all those parts? Although I did recently find out that Lego’s website stores all the instructions. Maybe I’m just a little old fashioned…at 35 haha!

Anyway, this got me thinking about how often we, as investors, deviate from what the stock was always designed to do. We seem to lose the instruction manual too often and our imagination and creativity seems to run wild like my 4 year old son with his Lego.

So I decided to take the liberty and list 30 facts about the stock market. What it was designed to do, how it operates, it’s performance and behaviour, and some of the facts that many folk in our industry seem to ignore:

  1. Stock markets exist and were conceived in order to allow companies to raise equity from the public in exchange for shares in that company.
  2. For every seller of a company, there is a buyer.
  3. For every buyer of a company, there is a seller.
  4. Over the long-term, the Australian share market has returned 8.5% pa.
  5. On average, the number of times the stock market moves up or down 1% within a day is 57 times over one year. In 2017 we witnessed 20 +/-1% days, and in 2018 so far we’ve witnessed 6.
  6. Australia makes up 2.1% of the world’s stock market. The US makes up 52.2%.
  7. The Australian stock market is made up of 40% in banks, and 18% in mining.
  8. Since 1926, we’ve witnessed 10 bear markets (declines of 20% or more). On average, the decline has been 45% and lasted for just over 2 years. The shortest was 3 months, and the longest was 5 years.
  9. Since 1926, we’ve witnessed 11 bull markets (including the current). On average, the climb has been 159% and lasted for 3.5 years. The shortest was 13 months, and the longest 9.5 years.
  10. Since 1926, we’ve experienced 15 recessions. That’s 1 in every 6 years.
  11. The average recession lasts 15 months, and the average expansion lasts 47 months.
  12. Over long periods of time, small company stocks beat large company stocks.
  13. Over long periods of time, the average investor under performs the stock market by a about 5% pa.
  14. Over long periods of time, professional investors under perform the stock market 77% of the time.
  15. Over a rolling 10 year period, the stock market has not lost money.
  16. The biggest gains in stocks are made while the company is on the way to the top, not after the gains are made.
  17. The stock market returns double digit gains or losses in 70% of all calendar years.
  18. The stock market lost almost 90% of it’s value during the great depression.
  19. The Japanese stock market has done nothing since 1989.
  20. Dividends make up about 42% of an investor’s return.
  21. If you missed the best 10 days in the stock market over the last 20 years, your portfolio would have returned 67% less than the market. If you missed the best 40 days, your portfolio would have returned 114% less than the market.
  22. If you missed the worst 10 days in the stock market over the last 20 years, your portfolio would have returned 150% more than the market. If you missed the worst 40 days, your portfolio would have returned 952% more than the market.
  23. 90 days of the year generates around 95% of all the year’s gains.
  24. The US stock market rose 22% last year. 25% of that return came from 5 companies. 10 companies made up 35% of the return. 23 companies accounted for half the return. Apple’s return alone was responsible for of the index’s total return then the bottom 321 (of the S&P 500) companies combined.
  25. From 1980-2014, 40% of all the Russell 3000 stocks lost at least 70% of their value and never recovered.
  26. The stock market has experienced an average intra-year decline of 13.8% every year since 1980.
  27. The average return of stock markets are between 8-12%, yet stock markets see gains within this range only 5% of the time.
  28. The stock market produces a positive return 3 in every 4 years.
  29. The stock market produces a negative return 1 in every 4 years.
  30. Stocks go up most of the time.

The stock market needs to be looked at as owning a piece of a company, a business. The ownership or worth of a business represents it’s futures earnings power. I strongly believe that as technology progresses, as we become more innovative and efficient, profitability should increase, and therefore businesses become more profitable, and businesses become more valuable – on the whole. During this process, we’ll witness and many of us will experience default. But I believe this is part of the evolution and progress.

Returns on the stock market are not promised to anyone, nor are they guaranteed. Having said this, the track record of the stock market is compelling. If you’re patient and disciplined enough, you too may be able to participate in what it has to offer.

Source:

Index Fund Advisers

JP Morgan – The Agony & The Ecstacy

JP Morgan – Guide to Markets (Australia)

Vanguard/Andex

Morgan Housel

Ben Carlson

SPIVA

The Art of Wu Wei

For 30 years ending 2016, the US stock market returned 10.16% pa. Yet the average investor for this same time frame generated 3.98% pa. This is the behaviour gap folks. A 6.18% pa behaviour gap!

Staying disciplined through the gyrations, and heart-stopping rises and falls of modern markets isn’t always easy, yet it’s crucial for your long-term investment success.

When it comes to investing, we look beyond short-term fads, the panicked reaction, the rumoured sure thing and the ‘my gut feeling is to (whatever)’, and we build investment portfolios based not on intuition, forecast or rumour, rather, on research and evidence.

At Baharian Wealth Management, we don’t purport to our clients or prospective clients that we hold the secret sauce to investment management. That we hold market information that no one else does. That we have the ability to beat the market. At BWM we spend our time and energy ensuring the market doesn’t beat us.

Far too many people and firms focus their energy and efforts into pursuing something that is statistically improbable. Their job is to keep you as their investor/client, amused and entertained. It’s nothing more than dinner theater. President Lincoln once said, “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.”

There are three key over-arching factors that help us bridge the (6.18% pa) behaviour gap:

  1. We think about factors rather than forecasts,
  2. We think about probabilities rather than possibilities, and
  3. We focus on process rather than the outcome.

We focus our energy on aspects of investment management that we can control; human behaviour, diversification, costs, and rebalancing.

If you want to succeed as a long-term investor, take the time to understand the Taoist concept of Wu Wei, which literally translates to “act without effort”. The practice of Wu Wei are fundamental beliefs in Chinese thought and have been mostly emphasized by Taoism. It means natural action, or action that does not involve struggle or excessive effort – it manifests as a result of cultivation.

Be clear on your investment goals, put in place a disciplined process and plan that is going to help you achieve them, and stick to it – avoid over thinking and avoid the panicked over-reactions (fear-sell/greed-buy). Let the process unfold – it takes time.

Several years ago, Charlie Munger was asked by a probing journalist, “If what Berkshire has done is so simple, why haven’t more people copied it?” To which Munger replied, “More investors don’t copy our model because our model is too simple. Most people believe you can’t be an expert if it’s too simple.”

Long-term successful investing is simple, but not easy.

If you want to know more about how we think about investing, click here. We’ve uploaded two documents at the bottom that the page that you may find of interest. Or feel free to get in touch.

 

 

 

Do The Opposite

I sold my share portfolio last week. It’s just too risky – you know, Trump, China, interest rates, there’s just too much risk in the market at the moment. The whole lot I replied? Yep, the whole lot. I’ll get back in when it’s less risky.

This was the latest portfolio positioning for a (I think mid 40’s) gentlemen I met over the weekend through a mutual friend. What do you think he asks, you’re in finance, right?

I get this question all the time. As soon as people find out what I do – Where should I investment my money? Is the market going to crash? What do you think of the property market? I love discussing markets, so I’m happy to roll with the conversation. Financial history fascinates me, so too does the ongoing propensity of poor decision making by individuals.

People always want something to talk about. Whether it’s crypto-currency or trade-war, choose the rabbit hole you want to go down – you’re not short of them. As advisers, and in fact as investors, we need to be able to separate the conversation that is going on at kid’s birthday parties and bbqs, with what people are actually doing with their money.

The noise

People have been investing money for centuries. They’ve been doing so through good news and bad. This is one of my favourite charts. It plots the US stock market’s tumultuous history from 1896 to 2016 and highlights major events during this time – from the sinking of the Titanic to Brexit and everything in between. Notwithstanding the 121 major events, the chart proves once again that over the long-term, the stock market has risen as the drive for innovation and productivity trumps fear (click for larger image).

Source: Chris Kacher – MoKa Investors

It’s not the poor decision making by individuals that puzzles me, it’s seeing the evidence and proof that what you’re doing just doesn’t work, yet still doing it anyway is what puzzles me. It’s insanity as Albert Einstein once succinctly defined:

“The definition of insanity is doing the same thing over and over again, but expecting different results”

The average investor

There’s never one portfolio solution that will meet every investor’s objective. Whether you’re in your 70’s, seeking a regular and stable income, or whether you’re 45 trying to grow your asset base for your future, the two portfolio’s are going to look very different. The one thing that these two investors have in common however, is that (typically) they look for activity and complexity.

Staying the course, staying diversified, keeping your costs low is far too boring for these folk. And because it’s boring, they seek complexity and activity. Yet, the evidence suggests that because they’re doing the opposite of what they should, they lose money. And when I say they lose money, I mean they leave money on the table. They don’t generate the returns they should have generated should they have stayed the course. It’s as if you don’t even realise what you’re doing because you’re still generating some rate of return, albeit lower than what you should (but you never knew that).

Source: JP Morgan

Our industry thrives on these types of investors. And investors love hearing from the mouth piece that has a great story to tell. It’s a match made in heaven. For the most part of our industry (and I’m ashamed to say it), their job is to keep you as their investor/client, amused and entertained. It’s nothing more than dinner theater.

In the pursuit of trying to beat the market, the average investor falls short – by a huge margin.

You have to understand one important thing, about the market and that is for every buyer, there is a seller. And every seller, there is a buyer. So when transactions take place, the only winner, net, is the man in the middle. The croupier in the gambling casino.

– Jack Bogle

The perils of market timing

He sold his share portfolio because the market was too risky, and he’ll get back in when the market is less risky. He may get the first part of this call right, but he then needs to get the second part right too – when does he get back in?

The best investors in the world can’t get this right. They can’t pick the winning stocks, they can’t pick the manager who picks the stocks to beat the market. What makes you think you can?

I recently shared this chart, and I think it’s timely to share again. Harvard University’s endowment has trailed the S&P 500 index for the last 1, 3, 5, and 10 years. This is the largest university endowment fund in the US with some of the smartest people too, you’d think the fund’s investment returns would be out of this world. Yet even the biggest and the best can’t beat the market over the short, medium, & long-term.

Source: Bloomberg

It’s crazy but true.

If you’ve ever attempted to time the market, you don’t need me to tell you how difficult, stressful, and time consuming it is. To efficiently time the market, you need to be right twice – selling at the top, and getting back in at the bottom. Rarely anyone can predict either – it’s almost impossible as skill, more possible with luck. You may not have “lost” money, but allow me to show you what you left on the table.

Historical data clearly shows that staying invested and following a consistent strategy produces larger returns over time than letting current events or market valuations drive your investment approach.

Here’s the performance of $10,000 invested between 1 January 1997, and 30 December 2016. The chart shows the return of an investor who stayed the course (7.68% pa), the investor who missed the 10 best days in the market (4% pa), 20 best days (1.57% pa), and so on, you get the picture. Missing the 10, 20, 30 best days over a 20 year period makes all the difference in the end – the margin for error is so small!

Source: JP Morgan

In summary

I know how difficult it can be. It’ tempting – the excitement, the thrill, the belief that you’re smarter or different to the millions of other investors trading on the same day. Yet the evidence is clear. Unless, your Warren Buffett or Jim Simons, don’t risk your family’s future by gambling away your wealth.

Next time your find yourself itching to do what you normally do, pause for a moment and maybe do what George Costanza once did – do the opposite.

You Don’t Design a House Based on a Weather Report

You don’t design a house based on a weather report.

Robert Frey

When I first heard this analogy from Robert Frey, a former hedge fund manager and quantitative investor, whose firm was bought out by Jim Simons’ Renaissance Technologies, an investment management company who’s performance trumps those of Warren Buffet’s Birkshire Hathaway, I thought it was so simple, yet absolutely brilliant. How true it is.

A snapshot of Jim Simons’ Renaissance Technologies

While many believe that value king Warren Buffett is the greatest investor of all time, his 17.1% average annual return over the last 29 years looks very pedestrian compared to those produced by the 90 PhDs employed by the $10 billion quant shop, Renaissance Technologies.

According to Bloomberg, the notoriously secretive hedge fund has delivered an extraordinary compound annual average return of 40.6% after its 5% annual and 45% out-performance (pa) fees since 1988 (or 2.4 times annually more than Buffett).

If you want to know more about Simons, check out this TED interview titled, “A rare interview with the mathematician who cracked wall street”. The man is a genius.

Anyway, Frey’s quote got me thinking about the similarities between architecture and portfolio management, and how similarly the two professions think.

Architects and Advisers love clients who come to the table with something to say. Clients who have thought about their goals, their ideas, the things that are important to them. It is the basis from which the design will evolve.

Architects and Advisers are trained professionals who have spent years studying, and gaining experience. You hire them as a wealth of knowledge to contribute. So be open to new ideas.

Architects and Advisers (good architects and advisers) will take the long-term into consideration. You want your project and money to last, without having to put more money into it. If you want a classic home, don’t fill it with trendy ideas that will fizzle into the future.

In the end, you need to feel confident and comfortable with, and trust the professional you engage. You’re going to be a team. It’s a personal journey.

As you wouldn’t build a house based on a weather report, don’t build an investment portfolio based on an investment forecast. The weather changes daily, so too do the investment forecasts.

Like you would with your important project, be clear on your vision, and think about what you want to get out of your investments. Seek professional advice. Be open to new ideas, and please, don’t cut corners on the finishings of your dream home. You know it’s not worth it.

Ignore the Headlines and Advice From the “Experts”. Here’s Why.

When a major global bank advises clients they should “sell everything” investors had better take notice. Or should they?

It’s January 2016, RBS advised it’s clients to brace for a “cataclysmic year” and that they should

“sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small”

The bank expected stocks to fall by 20%, with a deeper decline for the London stock market. The bank’s research chief for European economics and rates was convinced, “This is your number one theme for 2016, without any question in my mind”.

UBS quickly jumped on the bandwagon, and issued a “significant change” to it’s house view, saying policy chaos in China had unsettled markets. They went so far as to cut their stock market exposure from overweight to neutral on a, wait for it…”six-month tactical horizon”. They went underweight emerging markets.

Pessimists were warning that unless there was a batch of unquestionable good data over the coming months (remember, this is back in January 2016), the sell off could become self-fulfilling and quickly metamorphose into the next global crisis.

So let’s take a look at how your investments performed since.

Source: Thomson Reuters

  • Blue line – London stock market: +1.24%
  • Red line – International fixed interest: +2.22%
  • Orange line – US stock market: +13.34%
  • Green line – European stock market: +17.83%
  • Purple line – Emerging markets (the asset class you were specifically advised to underweight): +25.70%

As tempting and enticing these splashy headlines can be, the reality is that it’s simply guessing. Making large bets like this on outcomes that are difficult to even place probabilities on, is simply speculation, it’s not investing.

Investors should focus on the things they can control. Having a game plan, maintaining diversification across stocks and bond, currencies and geographies, keeping costs low, and avoiding short-termism.

Wealth is created over long-periods of time. It requires discipline and patience – probably the two most common attributes of successful investors.

Don’t believe me, here’s more from an ex-finance journalist.

Here’s What Happens When Markets Crash

Eight years ago, the US and Australian stock markets slid 55.65% and 53.95% respectively, all within a 15 month period. Your $1,000,000 share portfolio would have been worth around $450,000. Here’s what it looked like (click for larger image):


Source: Thomson Reuters

Investors were liquidating their portfolios and piling into cash as there was no end in sight. Fear and uncertainty were at an all time high, even though the duration of this bear market was shorter than the average.

In fact, by the time the market bottomed out in 2009, investors were selling down their share portfolio at the fastest pace in over a decade. Precisely at the worst time (click for larger image):

The ‘pros’ were giving in too. In 2009, global fund managers’ allocations to the share market relative to other asset classes were at an all time low.


Humans are an irrational bunch. We tend to think in certain ways that lead to systematic deviations from good judgement.

Here’s what happened next. US stocks climbed a whopping 255.44%, and Aussie stocks up (a mere, relative to the US) 82.79% (click for larger image):


Source: Thomson Reuters

With the stock market at all time highs, and having lasted for so long, we’re hearing commentators and investors question the market’s ability to push any higher.

The current bull market has lasted around 8.1 years, making it the 5th longest bull market since 1926. Although it feels like it’s the longest, right? In fact, it’s also 5th not only in it’s duration, but also in magnitude.

Since 1926, the average bull market has lasted around 8.9 years, with an average cumulative gain of 468%. The current bull market has gained around 255%.

What’s interesting from the chart below, is how dominating the blue shaded areas are relative to the orange (bear markets). The average bear market has lasted 1.4 years with an average cumulative loss of 41% (click for larger image):

I thought it would be interesting to see the stats for the Australian share market, so I ran the numbers and have summarised in the table below:

Of the 351 months since 1980, the Australian stock market has been up 220 periods (63% of the time), and down 131 periods (37% of the time).


Source: Returns 2.0

If you then extend your time horizon to a rolling 5 years, since 1980, the Australian stock market has only ever seen 1, 5 year period of negative returns. It began in 2007 and fell on average -4.27% pa for 5 years. Every other 5 year rolling period has seen the Australian share market return a positive number with an average return of 11.52% pa (click for larger image):


Source: Returns 2.0

Even after one of the greatest crisis in history, if you had simply held course, here’s what your portfolio would have looked like. A $1,000,000 investment at the peak of the stock market would be worth $1,325,000 today (click for larger image):


Source: Returns 2.0

Whether this market will collapse tomorrow, or in 12 months from today, nobody really knows. What is certain however, is that there will be another collapse, and that you’ll be told that it’s different this time (it’s unlikely to be). In the end, it’s completely out of our control.

Design and construct your portfolio today as if the market will crash tomorrow. Because that is when your true emotions will flourish. How tolerant are you to volatility and risk. What is your investment horizon. How patient and disciplined are you. These will all be challenged. Your actions from these emotions, are all in your control. What the market does is not.