We base our investment approach on the Bourlet Consulting 10 founding investment principles
1. Let the markets work for you
Rather than trying to second guess the market, let it work for you.
The market is an effective information-processing machine. Millions of participants buy and sell securities in the world markets every day, and the real-time information they bring helps set prices. When the investor rejects speculation, investing becomes a matter of separating risks. Those that investors are compensated for (market risk) from those where they receive no compensation (individual company risk, industry risk, single country risk and so on). It’s then a question of determining how much of these risks to undertake.
Financial science identifies the sources of investment returns and we provide the tools and experience to achieve them.
2. Investment is not speculation
Many factors influence the performance of funds – a major one being costs and taxes (see principle no. 8). However, the factor that usually receives most attention is the alleged ‘skill’ of the fund manager based on his or her superior market knowledge. In fact the overwhelming majority of research indicates that there is no way to identify superior performers in advance – and all will have their ups and downs.
Therefore, we eliminate the risk of choosing the wrong manager by following a broadly diversified approach that does not rely on stock picking or market timing.
We believe the market’s pricing power works against fund managers who try to outsmart other market participants through stock picking or market timing. As evidence, only 19% of US equity mutual funds have survived and outperformed their benchmarks over the past 15 years. In addition, very few managers that do perform well repeat their performance in subsequent time periods. Studies of the European fund market find similar results.
3. Take a long term approach
The financial markets have rewarded long-term investors. People expect a positive return on the capital they invest and, historically, the equity and bond markets have provided growth of wealth that has more than offset inflation.
When it comes to risk and return, research shows that investor portfolios are best served by being diversified across all asset classes, as well as within all asset classes. That’s because each plays a different role in the portfolio, and the sum is often greater than the parts. Indeed it’s our experience that, with sound diversification, investors can achieve greater expected returns over time and experience lower volatility than they would in a less comprehensive portfolio.
Diversification also helps reduce risks that have no return, but diversifying within your home markets is not enough. Global diversification widens the range of diversification options.
Data Source: Dimensional Fund Advisers
FTSE All Share Index and Globally Diversified Portfolio made up of: 45% MSCI World Index, 20% Dimensional Global Large Value Index, 20% Dimensional Global Small Index, 15% MSCI Emerging Markets Index
5. Look beyond the headlines
Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future whilst others tempt you with the promise of an easy profit. If you are tempted by the stories, consider the source and the question the reason for the headline.
6. Consider the drivers of return
Academic research has identified these equity and fixed income dimensions, which point to differences in expected returns. These robust dimensions are pervasive across different markets and persistent across different time periods. They can also be pursued in cost effective portfolios.
7. Avoid market timing
Investments generate return from income (interest and dividends) and capital growth. The total return from a portfolio is the sum of these two parts. When selecting potential investments for a portfolio, we decide based on the potential total return relative to risk – not how that return is made up in terms of income and capital growth. This is the only academically sensible way to build an investment portfolio.
8. Minimise costs and taxes
Over long time periods, high costs such as management fees, fund expenses and taxes can drag on wealth accumulation in a portfolio. You should strive to incur only those costs that are unavoidable and those that add value to your investments.
9. Manage your emotions
Many people struggle to separate their emotions from investing. Markets go up and down. Reacting to current market conditions may lead to making poor investment decisions at the worst times.
10. Focus on what you can control and rebalance
Once a portfolio is formed from various asset classes, security prices will fluctuate and asset proportions will diverge from the target proportions. Left to drift, a portfolio can evolve into an asset mix with decidedly different risk and return characteristics from the initial target. Therefore, rebalancing entails the adjustment of a portfolio’s asset proportions. We will do so by selling over-priced ‘hot’ sectors and move into low-priced ‘out-of-favour’ sectors – often precisely the opposite to what most investors are doing.
A financial adviser can create a plan tailored to your personal financial needs while helping you focus on actions that add value. This can lead to a better investment experience.