The 3 Cs
There are three excellent reasons to consider managing your own money which we know at the 3 Cs of investing:
Cost, choice, and control.
The cost of advisory and fund management fees can be very detrimental to returns.
If the ‘average’ annual return from markets is to be about 7-8%, then losing 1% of that makes a colossal difference to your long-term wealth (try putting those figures into a compound interest calculator!).
There’s nothing wrong with paying fees if these costs are helping you to achieve higher returns, but unfortunately in aggregate this has not proven to be the case.
This fact alone makes a great argument for learning the skills to manage your own money.
The fees saved over a lifetime of investing are remarkable enough, but it’s the extra compound growth consequently allowed to flourish which makes for the truly powerful difference.
Most advice is not appropriately tailored to the individual, and most investors and advisors have a ‘home bias’.
But it’s a big world out there, and, because trees don’t grow to the sky, no one stock market can outperform consistently.
In fact, look back through time you’ll find that often the markets that have been the most out of favour over the past year or two become the biggest winners over the following 12-24 months:
Source: Novel Investor
And the research shows that the difference investing in markets which have become very cheap can make to your returns over time is enormous.
Looked at another way, check out the best and worst years in the graphic below for each of the major international stock market ETFs:
For example, the ‘average’ returns from Australian stocks might be about 8%, but this average includes shocking years such as 2008, followed by amazing years such as 2009.
A similar dynamic also applies to emerging markets, and stock market sectors, and investment styles.
The good news is that these days you don’t have to be an expert stock picker, because you can simply invest in a stock market index to capture comfortably strong enough returns.
Fund managers may be reluctant to invest in ‘loser’ markets for fear of looking stupid or losing clients.
But this can be your advantage, allowing you to take full advantage of opportunities as they continually arise in international markets.
Mostly advisors will tell you that the best time to invest is right now, and that you must be fully invested all of the time.
Does that advice help you, or help to generate advisory fees?
Take another look at the worst years in the table above and consider what a 50% loss might mean for your net worth if you’re fully invested in an expensive market.
The key to becoming very wealthy over time is avoiding losses to continue compounding your portfolio and net worth.
And you can do this successfully by thinking of your investments as a series of bets (a strategy known as the Kelly criterion), and by directing those bets towards markets demonstrating value.
By managing your own money you’re free to pick the allocation most suitable for you, your stage of life, risk tolerance, and goals.
Low rates, high returns
The often-quoted ‘average’ returns from stock markets can be a very misleading figure as the graphic above shows.
The average annual return tends to include years of tremendous out-performance (which, for example, we’ll see in 2019), inevitably followed by years of relative under-performance.
Never forget the asymmetrical nature of returns; for example, to recover from a 50% loss then you need a 100% return just to get back to where you started.
When developed markets such as Australia become cheap then, yes, it’s plain sailing: hoist the mainsail and simply let the market bring the great returns to you!
When you’re facing headwinds, however, then you need to work a bit harder.
At this stage in the global cycle, and with many developed markets now so historically expensive, we now believe it makes logical sense to sidestep the potential for significant drawdowns.
The good news is that with an appropriate allocation and a simple rebalancing map, you can achieve comfortably better returns than average through the cycle.
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