“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”
We often hear the last part of this wonderful quote from Warren Buffett, but as financial advisers, we find the beginning just as instructive. We thought we would unpack the entirety of his thoughts and dissect it for our clients.
Excitement: We often see investors clamouring to buy the latest stock or investment- usually because it has had a fantastic write up or stellar past 12 month performance. This excitement will usually drive up the price resulting in people paying too much. Sadly, some of these investments lose their momentum and can fall in value - leaving the unwary investor out of pocket. Often the more stable boring investments which are well managed, are in growth markets and are not so affected by hype end up being the better longer term solution.
Expenses: The two main expenses in investing are annual management fees and trading costs. The larger the fund management firm, the more economies of scale they can get and potentially the lower the management fee. Over trading also adds a significant amount to the costs. (up to 0.86% according to the Financial Analyst Journal article titled “Shedding light on Invisible Costs”) This is where a fund manager buys and sells at such a high level that the trading costs outweigh the benefits derived from the trading. We at Milestone look very closely at what is called the Total Expense Ratio (TER) of a fund and will use funds on investment platforms where we can negotiate a discounted rate for clients.
Market timing: This is where an investor attempts to identify the very best time to enter the market. Many claim success but history proves it is usually short lived. To be successful, one has to time when to buy and also when to sell and inevitably, both decisions do not end up being successful. A number of investors, both institutional and individual, had a bad gut feeling during the 2007-09 financial meltdown and bailed out of the stock market. Many of them saved themselves some money for a while. Unfortunately, nobody rang a bell to get back in and many of them missed the terrific move in stocks since 2009.
Greed: A natural sense of greed will drive many investors to the higher performing market areas such as China, oil, commodities in general and technology stocks. This can lead to over concentration in these higher risk areas which means the portfolio is harder hit in a downturn. We at Milestone believe a good steady return for minimal risk is better than chasing the highest return that can be achieved.
Fear: There is a constant fear that the financial markets are broken, that the latest geopolitical issue or war will ruin investments and that the share market is too risky. These fears are misplaced. History shows that the markets always recover and that over time, shares outperform property and other asset classes. If shares were not the best performing asset class, then we would not have a nation of business owners. Often, investors look at share performance over the short term and become concerned with the volatility. However, much of this volatility is reduced when shares are viewed over a three year or longer timeframe.
Our role as a financial adviser is to build portfolios which meet your risk profile, will stand the test of time, have a good risk adjusted return and allow you to sleep comfortably at night.