Four proven financial approaches to investing
“Are my investments secure?”.
It’s a question that has been put to us regularly over the last twelve months. And understandably so. The events of 2020 are enough to rattle even the most confident investor. So what’s the best investment approach to take?
While everyone’s situation is different – and we don’t have a crystal ball for the months and years ahead – there are aspects we can all focus on to shore up our portfolio and move forward with confidence.
To shed some more light on how to approach our investment decisions we went straight to the experts, both within Tribeca and from Vanguard, one of the largest and most respected money managers in the world.
Want to know the real value of advice? Vanguard’s Head of Corporate Affairs offers her views here.
Invest using an index approach
There are two types of approaches to portfolio investing – active and index.
Active investing involves relying on your own guesswork or trusting your money to a fund manager who uses their investment skills to try and beat the average market return.
With index (or passive) investing, it means holding investments that track the performance of a particular market or index. For example, the S&P ASX/300 index that you hear reported in the TV news each day tracks the largest 300 companies listed on the Australian Stock Exchange (ASX). Investing directly you would need to have a huge amount of money to make it worthwhile buying some shares in all 300 companies, so that problem is solved through Index Funds and Index Exchange Traded Funds (ETF’s).
At Tribeca we recommend an index approach as it consistently performs well compared to the thousands of active funds and provides greater diversification and certainty of investment outcomes for the long-term. This is backed up by the SPIVA Scorecard, which is a robust and widely-referenced research piece which compares the performance data of active funds vs index funds in key markets across the globe. In Australia over the past five years, 79.94% of active funds have underperformed the index and have charged substantially more for that privilege.
This cost factor is another reason why we prefer indexing as it is geared towards minimising costs, aligns more strategically with the risk profile of each client, and makes the complex simple. This last point is critical. With all the confusion in the market right now, the easier things are to understand the better.
At the same time, our advisors are constantly reviewing the performance of funds and shares and will always recommend any improvements or changes to an investment portfolio, including moving to active investing if the evidence stacks up. For example, we use Vanguard’s Capital Markets Model as a great resource for simulating how a portfolio might behave over time and evaluating the risk-return trade-offs of various choices.
Watch this short video from Vanguard for a great snapshot of index investing.
Taking predictability and uncertainty into account
As we stated earlier, we don’t have a crystal ball to predict the future. No one does. So how is it possible to forecast?
We adopt the same proven philosophy as Vanguard for market forecasting. Simply, we don’t gamble by offering guesses about where the markets might be in one or three months. We take a much longer-term view, with our forecasts based on annualised returns over a ten-year horizon. Research shows this approach delivers a reasonable degree of accuracy, and accuracy over time is what gives our clients more certainty.
It’s also not about making pinpoint forecasts, as this is set up for failure. Rather, we offer likely ranges of potential returns so that our predictions are based on reality not fanciful hopes about the future. Like Vanguard, we believe forecasts are best viewed in a framework that acknowledges the uncertainty of being able to predict the future, especially for times like we are experiencing now.
For us it’s about offering greater confidence rather than generating false hope. We know that’s what our clients value from their investments and advice.
Focus on the bigger picture
The last twelve months has certainly changed the global economic outlook. At the start of 2020, most major economies were expected to grow more slowly than in recent years, but not stall. The pandemic led to large sections of those economies shutting down, putting them on track for historic declines in output and surges in unemployment. It resulted in most major economies shrinking.
But despite all of this, there is still light on the horizon, as has been witnessed with Australia’s economy which has been able to rebound quicker than expected despite the dim predictions of a long recession.
So what does this mean for the investment outlook?
If you’re looking for short-term gains, strap yourself in for a rocky road. However, the long-term approach based on an index strategy looks far more solid.
We all need to remember that in the short-term, the price of shares and other investments are controlled by emotions, and decisions made in an emotional state of mind are rarely helpful. Plenty of people, including active investment managers, will be punting on where sharemarkets are going to go – they will be trying to out-guess each other with all sorts of clever theories. Some might look like champions in six months or a year; others like failures but no one can tell you with certainty in advance which ones will be which.
That’s why at this stage in the economic cycle, our recommendation is to focus on the bigger picture by saving money on investment fees and trusting the index. It will be beat most of the so-called experts.
Interested in how Tribeca maps out your future plans? Click here.
Stay the course
So what’s the main message out of all of this. Yes, the future looks challenging and unpredictable. But that doesn’t mean you should change your approach.
This is not the time to be looking for a quick win on the share market, however tempting that could be. Or a call to abandon high-quality bonds (expected to return between 0.5-1.5%), which will continue to play an important role in diversified portfolios as a safeguard to riskier assets like shares.
It’s a time for calm and clear thinking; to make smart decisions, like reviewing your portfolio in case it needs rebalancing due to the recent market movements. And making adjustments to suit your risk tolerance if your financial situation has been impacted. It may even be time to start an investment depending on your time horizon.
The short-term will be volatile – it always is. One thing history can teach us is that there will be a recovery, and if you wait to see it, then it’s likely that it will already be too late to invest.
Our suggestion is to control what you can control. To stay the course. And stick to your investment plan if you have time on your side.
To read more about Tribeca’s investment advice, click here.
If you don’t have an investment plan, or would like to discuss your investment situation, we’re always ready to chat. Please talk to your advisor or arrange an appointment with one of our Tribeca Tribe here.