Just spend an hour listening to some of the swanky financial commentators on Bloomberg or CNBC talking with (educated) confidence about where they think markets will be in one year, or with clairvoyance about where a particular stock will be in six months. You wouldn’t be blamed for thinking that financial markets and investing are far too complicated for the average person to understand, and can only be navigated with the advice of old men in flashy suits, a pocket square and a pinky ring. Keep listening and you’ll realise that these experts all have different views that contradict and some that utterly oppose, and after a year, many of their views have been proven wrong.
Then try spending an hour with an expat financial adviser who has just landed the job after a stint selling second-hand cars (no offence to second hand car salesman) and who took the job having been sold the dream of making enough commissions from unsuspecting expats to provide themselves with the pension they don’t have so that they can finally retire. (Granted, not all are like this).
You’ll soon realise a commonality, that they are all rather convincing (albeit in different ways). And that’s all it is. The difference between those who work in the money management industry and their clients is that the former are trained to make the latter feel that their expertise is relevant and required and that they know it all anyway, so just agree and sign.
That doesn’t mean to say all finance professionals are wrong and advisers are invaluable. Investors (especially expat investors) just need to differentiate between those that are trying to educate and advise (and admit they also don’t know it all), as opposed to those that are trying to sell you a product and convince you that their word is gospel. Spouting complex terminology doesn't go very far to earn trust these days. Neither does wearing a $3,000 suit. Or investing client money in expensive mutual funds with expense ratios through the roof. I'm the first to admit that I have been guilty of at least one of these practices in the past at firms I have worked at.
Andrew Hallam, author of "Millionaire Expat," expresses in his book that by spending just 90 minutes a year on an investment portfolio you can beat most professional investors. And he’s kind of right. This certainly doesn't make the advisers’ job redundant, for a skilled adviser knows their clients well enough to know what combination of investments will work for each person, but it certainly points to how simple investing can and should be for those without PhDs in Finance. It also speaks to advisers to be transparent and add value in ways other than the ways value is added solely to their own pockets.
To have a successful long term investment portfolio, all you really need is tax-efficient, low-cost investments whilst making wise decisions about asset allocation, depending on your personal situation. With the right guidance on this from a credible adviser who can explain it clearly without attempting to bamboozle you, your long term goals will more than likely be reached.
Put simply, asset allocation is the implementation of a strategy to balance risk and reward by apportioning your portfolio's assets according to your individual goals, risk tolerance and time horizon. A simple understanding of this goes a long way to understanding how you should be investing, without having to understand complex formulas or terminologies.
David Swenson, the late legendary investor who oversaw Yale University's endowment, wrote in his book, “Unconventional Success", that capital markets provide three tools for investors to employ in generating investment returns: asset allocation, market timing and security selection.
If there is an iota of information to take away from this post, it’s that asset allocation decisions play one of the most important, if not the most important, roles in determining investment results. Not picking stocks, or timing markets. (I will discuss this at length in a separate post). Swensen explains that a number of well-regarded studies of institutional portfolios conclude that approximately 90% of the variability of returns stems from asset allocation, leaving approximately 10% to be determined by security selection and market timing.
“By avoiding extreme allocation shifts and holding diversified portfolios, investors cause asset allocation to account for the largest share of portfolio returns.”
Swensen also championed the idea of investing in low-cost index funds and steering clear of actively managed mutual funds with higher fees that consistently fail the average investor. Expats, or any investor for that matter, should take the hint and work only with advisers that utilise low cost products, low cost funds, and who have a solid understanding of their clients individual goals in order to implement an appropriate strategy.
There is no one-size-fits-all. At the end of the day, every investor should follow a strategy that has the highest odds of successfully meeting their individual goals. For most, compound investing into low-cost index funds will provide the highest odds of long-term success. That's not to say index investing will always work and active stock picking is doomed to fail. Beating the market should be made difficult, otherwise everyone would do it, and if they did, there would be no opportunity. So you shouldn't be surprised that the majority of those trying to beat the market fail to do so (around 85% of large-cap active managers didn't beat the S&P 500 over the decade ending 2019).
So, amongst all the technical jargon out there and slick salespeople flogging expensive products with little understand of portfolio management, some easy things to remember:
- Forget the noise and stick to your investment goals.
- Stock picking or trying to time the markets is a skill successfully executed by very few; history and statistics show that you won't outperform in the longer term.
- Asset allocation drives portfolio performance through efficient diversification.
- Keep portfolio costs to a minimum (think index funds and ETFs).
- Be nice to second hand car salesman.