Shares (also known as “Stocks”)
If anything in this world is well and truly misunderstood it is shares but, in fact, they a very good producer of investment returns. My lecturer in financial planning taught us, correctly, that shares are the “engine room” of any investment portfolio.
When you invest in shares you will be rewarded (nice word), for taking the risk, provided you take the key steps:
Invest in the right type of share fund.
Average in (buy some now and some later).
Rebalance regularly.
Be disciplined – stick to your plan.
Give it time – patience is needed.
There are Four Ways to Buy Shares
1. Direct
Buying a dozen or so individual shares is known as direct investing. This approach poses the usual problem – stock picking is a difficult game whether or not you DIY or use a stockbroker.
And a dozen or so is not nearly diversified enough.
2. Active Managers and Stock Brokers (they choose and manage the shares for you)
They cannot successfully and consistently forecast or pick the right stocks, year in and year out, yet overall costs will typically be 2% to as high as to 3.5% p.a.
“Our stay-put behaviour reflects our view that the stock market serves as a relocation center at which money is moved from the active to the passive.” Legendary investor Warren Buffett
A recent APRA study in Australia found that, from 2001 to 2006, the average actively managed superannuation fund underperformed the index by 0.9% p.a.
Regardless of all their expertise, the professional fund managers and stock brokers were not able to outperform the index.
3. Index Funds (passive)
They buy all the shares in the market so are not forecasting or stock picking, do not need expensive managers, and so have very low management expense ratios (MER’s) and costs.
Index funds are well liked e.g. If you held the S & P from 1987 to 2007 you got 11.8% p.a. – pretty good.
Billions of dollars are invested in index funds all around the world.
4. Asset Class Investing (ACI)
An enhanced method of index or passive investing.
Asset class investing takes the good parts of index fund investing, still at low cost, and improves on the index model – sophisticated yet beautifully simple.
You can rely on asset class funds to perform as well as, or better than, the index consistently, year in, year out.
“Out of intense complexities, intense simplicities emerge.” - Winston Churchill
What the Experts Say
Active managers seldom outperform the index whereas asset class funds regularly do.
Remember that asset class funds are in effect sophisticated index funds.
“Only 4% of active funds beat the index by a scant margin of 0.6 percent p.a., while 96% of active funds fall short of the index by an average of 4.8% p.a.” – David Swensen, Chief Investment Officer, Yale University Endowment Fund.
“The only value of stock forecasters is to make fortune-tellers look good.” - Legendary investor Warren Buffet.
“Our stay-put behaviour reflects our view that the stock market serves as a relocation center at which money is moved from the active to the passive.” – Warren Buffett.
“The road to financial perdition begins with a call to your broker who claims to be able to beat the markets.” – Daniel R. Solin, author.
“What is the best investment for the average investor? Thorley agreed with Odean: index funds.” -Thorley and Odean are professors who study the market.
“Index funds have regularly produced rates of return exceeding those of active managers by close to 2 percentage points. Active management as a whole cannot achieve gross returns exceeding the market index an must, on average, under perform the index by the amount of their expense and transaction costs disadvantages.” – Burton G. Malkiel, author of “A Random Walk Down Wall Street”.
“Even fans of actively managed funds often concede that most other investors would be better off in index funds. But buoyed by abundant self-confidence, these folks aren’t about to give up on actively managed funds themselves. A tad delusional? I think so. ‘Picking the best-performing funds is like trying to predict the dice before you roll them down the craps table,’ says an investment adviser in Boca Raton, FL. ‘I can’t do it. The public can’t do it.’” Paul Samuelson, Economist, Nobel Laureate.
What Asset Class Investing Can Do
Asset class investing is based on rigorous academic research, the science of capital markets, and decades of research.
An asset class portfolio incorporating bonds and shares allows you to construct an efficient, lower cost, diversified portfolio that will not let you down.
The chance of a product failure is virtually eliminated, since the bonds are A rated or better, and both bonds and shares are widely diversified.
What Asset Class Investing Can’t Do
It cannot eliminate volatility, as investment markets will always have their ups and downs, but remember (historically at least) markets have always had a lot more ups than downs.
In the US stock market since 1926:
- The average bull market ran for 1581 days and gained 244%
(a “bull market” means positive and upward)
- The average bear market lasted 452 days and lost -37%
(a “bear” market means negative and downward)
You will still have to put up with volatility but, (historically) again, every time markets have fallen they have gone on to new highs. Patience is the key and will usually be rewarded.
An Asset Class Portfolio Will Serve You Well Over Time
An asset class portfolio will serve you very well over time. It may go up and down sometimes but it will not go away.
Asset class portfolios are mainly available from independent advisers.
Asset class portfolios are liquid so access to cash is easy.
If income is needed, there are several “user friendly” options.
Savers can add money monthly or in lump sums.
Disclaimer – this publication has been prepared for your general information. Whilst all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken for errors or omission. You should seek the personal advice of your financial adviser before taking any action in relation to the matters dealt with in this publication.
