Becoming a successful investor [video series]

In this series of short videos, Simon Brown, partner and Chartered Financial Planner, explains what all investors should know to become successful. This includes the risks, behaviours and opportunities that are important to take into account when investing.


This video is an introduction to a series of short videos on the common questions clients have about how to become successful investors.

Simon Brown, Partner and Chartered Financial Planner:

Hello, I’m Simon Brown. Over 30 years of advising clients I find there are common questions clients have. I find these mainly revolve around uncertainty about ‘how do I become a successful investor?’ Our role is to help clients by controlling behaviour rather than pretending that we can find the best investments. This process starts with empowering clients through a series of easy to digest videos. You can pick any of the videos below or simply go to the question that interests you the most.

The Videos:

What sort of competition do I face as an investor?

Simon Brown, Chartered Financial Planner:

There are millions of investors and computers creating millions of market transactions every day and those transactions create real time information which set the market prices. This means competition is intense.

Attempting to outguess the markets is a zero-sum game, for every winner there has to be a loser. From a mathematical perspective, all returns form a normal distribution, so the majority cluster around the middle of the distribution, or the average return.

This blue zero-sum bell curve shows the outperforming investors equal the underperformance. The sum of the two equals the market return. The problem is, it costs to play the game, more than half underperform and the outperformers are represented by the white reception. In today’s winners tend not to go on to be tomorrow’s winners, implying that short term performance is more likely to be due to random noise and luck rather than skill. The odds of finding tomorrow’s winning securities are gambling odds, which isn’t a good strategy for a long-term investment portfolio.

If you get promised high returns and a low-risk investment through trying to outguess the market, then you should be wary of the advice you are getting. For your long-term interest, investors should rely on the information in market prices to help build their portfolios instead of trying to find short-term opportunities.

Financial markets reward long-term investors over people who attempt to outguess the market.

Does strong past performance mean that a fund will do well in the future?

Simon Brown, Chartered Financial Planner:

Past performances are not indicative of future results. It is not possible to predict that the previous investment result will be replicated. Some investors select funds based on past returns. However, this chart shows that most US mutual funds in the top quartile, or 25%, of previous five year returns did not retain the top quartile ranking for the following five years. This demonstrates that the past performance offers little insight into a fund’s future returns.

Too many investors are temped into responding to market noise and short-termism, where they will keep making short term investment choices due to previous results. Market activity is too unpredictable to know that a fund will keep on growing following a strong spell. This could be described as ‘investing in the rear-view mirror', which is a short-lived strategy.

Instead of exploiting short term data, it is best to look at the market as a whole and set long term strategic plans using high quality low cost funds for longer portfolio prosperity, no investor should get fixated on previous successes and project that forward to future expected returns.

Is there a better way to build a portfolio?

Simon Brown, Chartered Financial Planner:

There are many ways to build a portfolio. We think it is best to establish a robust and highly diversified portfolio, one that bears the lever of risk that you can tolerate emotionally and financially, and this is likely to deliver returns you need to support the financial goals you want to achieve.

This diagram demonstrates our approach. Careful selection of asset classes is important. A proportion of your money should be held in return enhancers like global equities and properties. Then a proportion of your money should be held in defensive assets that are lower risk like corporate bonds.

It is important for us to understand your tolerance to risk both from an emotional and a financial need point of view. Key questions are: How disciplined will you be when markets go down? How much do you need to invest? And what return do you need to meet your goals?

The goal when we construct the equity orientated mix is to create a highly diversified asset class mix with developed markets at it’s core. It seeks to deliver robust returns in the broad range of future market scenarios. In the uncertain world of investing, the key is to manage the uncertainty as effectively as possible by focusing on taking risks that pay and diversifying broadly.

Will frequent changes to my portfolio help me achieve investment success?

Simon Brown- Chartered Financial Planner:

Making frequent changes to your portfolio will limit your long term financial success. As shown in the diagram, it is almost impossible to predict which market segments will be most successful. The table shows that the market changes year on year and it is too unpredictable to use a market timing strategy.

Allowing emotions or opinions about short term market conditions to impact long term investment decisions can lead to disappointing results. Also, evidence shows that market timing after trading will tend to leave you with a lower return compared to a long-term buy-and-hold strategy.

However, we do periodically rebalance portfolios to the original structure to make sure the agreed risk for your portfolio remains consistent. Disciplined rebalancing with pre-set criteria is when we sell some of the better performing assets and then buy the lesser performing assets. This is different to market timing where investors buy ‘hot’ performing asset classes.

It is important to make changes to a portfolio in order to control the agreed risk, but not to the extent that the returns will be less.

Should I make changes based on the news?

Simon Brown- Chartered Financial Planner:

No, daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future while others tempt you to chase the latest investment fad. Many investors base their strategy on reading ‘best buy’ lists or researching the latest investment or economic themes. However this doesn’t constitute a good long term investment strategy.

Investors need to avoid being overly enthusiastic when investing, which can be addictive. Investing should not be a source of excitement, and a low cost buy, hold and rebalance approach generally wins the day. Once you learn to work with rather than against the markets, this allows you to get on with your life without checking on or worrying about your investments. By keeping a clear long term vision without being influenced by day-to-day market movements, you can avoid the feelings of panic and concern which really affect many investors.

Markets can fall a considerable amount for a certain period of time, but discipline generally rewards. For instance, during 2016 the biggest market fall in equities was 9.5%, and if investors panic sold they wouldn’t have benefitted from the 28.7% return over the full year.

Investors need to embrace the uncertainty of markets, as it’s what delivers you strong long-term results. If markets fall, you still own the same amount of shares you did before so there isn’t a need to panic. A fall in those share prices doesn’t mean you’ve lost anything until you sell those investments at the wrong time.

By having a financial adviser, they are always there to talk to at any time and can act as your behavioural coach and urge you to look ahead rather than react to what is being said in the news.

What are my chances of picking an investment fund that outperforms?

Simon Brown, Chartered Financial Planner:

When it comes to making estimates for future asset class returns there is no absolute certainty. If forecasts of future returns could be made with a high degree of certainty then all investors would invest in the highest returning assets and ignoring all the other asset classes. The odds of finding an investment fund that survives a long period of time is like flipping a coin and choosing between heads and tails. The chances are even less with outperforming expectations.

The markets pricing power works against investment fund managers who try to outperform through stock picking or market timing, as both survival and outperformance rates tend to fall as the time horizon expands. This table shows only 40% of equity funds survive and outperform their benchmarks over a 15 year period. It surprises investors that many mutual funds or unit trusts become obsolete over time. About half of the equity in fixed income funds were no longer available after 15 years.

Financial markets favour long term investors who understand that the market is unpredictable and that diversify their portfolio across many asset classes.

Do I have to outsmart the market to be a successful investor?

Simon Brown, Chartered Financial Planner:

The simple answer is no, and the good news is nor does your financial advisor. Decades of academic research and evidence shows financial markets have rewarded long-term investors. People expect a long-term return on the capital they invest and historically equity and bond markets have provided growth of wealth which has more than offset inflation.

Instead of fighting with markets let them work for you. There are three main drivers of financial returns: Owning shares in companies where you receive income in the form of dividends, owning property where you receive income in the form of rent and lending money where you receive income in the form of interest.

This chart shows the split between investment types, otherwise known as asset classes. Asset allocation accounts for 90% of the difference in investment returns over time, so this is an important thing to get right. Those investors focused on outperforming the market through stock picking and market timing find that market pricing power tends to work against them.

If you attempt to outsmart the market your investments will be indifferent from the market, which means your investments will have a higher risk. Of course, if this risk pays off, you’ll get a large return, but this sort of speculation isn’t a good strategy for long term investment success.

Some financial advisors say they can outsmart the market by picking funds with market beating odds, protecting wealth from market falls by moving into cash, picking the time to move into strongly performing asset classes when markets are rising. None of these are safe for your long term financial success.

Is international investing for me?

Simon Brown, Chartered Financial Planner:

International investing is very important in creating a diversified investment portfolio as investing in your domestic market can be very restrictive and expose you to more risk. Global diversification can broaden your investment universe. Diversification helps reduce risk and is our one defence against having too many eggs in one basket. It is easily achieved by diversifying across economies, sectors and asset classes.

We believe this is proven to capture a broad market exposure to the whole global market and reduce the risk if the UK stock market fails to perform in the years ahead. The UK stock market only represents about 10% of world market equity capitalisation. So if you don’t invest internationally you are not taking advantage of the majority of the market, which could be very risky.

The UK market has sector biases, which means markets like financial services, energy and basic materials pulled a large weight in comparison to international markets. The global economy has a larger weight in technology, healthcare and industrials so this means by not investing internationally you will miss out on large markets to invest in.

How can my emotions affect my investment decisions?

Simon Brown- Chartered Financial Planner:

Perhaps one of the most important roles that an adviser can perform is making sure clients do not needlessly destroy their wealth through emotional decision making. Our own behaviour can have the greatest effect on wealth accumulation. Emotions such as overconfidence, greed, fear, panic, inertia, and hoarding can all contribute to por investment decisions and erosion of capital over time.

Greed and enthusiasm can lead to us making bad decisions such as buying high and selling low through fear and panic when prices fall. Being an investor isn’t easy and you need to be able to emotionally withstand the unpredictable nature of markets without letting irrational thinking get in the way. The majority of the investing population chop and change their investing strategy based on recent market conditions due to being too enthusiastic or fearful.

Economic theory demands rational thinking. At BpH Wealth, we make sure we understand your emotional strength in investing and produce and investment portfolio we truly believe you can stick with for the long term. The benefit of this is that if markets fall you will understand that you’re ok and can rationally think about your next move.

So what should I focus on when investing?

Simon Brown- Chartered Financial Planner:

We believe you should work closely with I financial planner who can offer expertise and guidance to help you focus on actions that add value and stop your behaviour from destroying your wealth. Focusing on what you can control and ignoring what you can’t can lead to a better investment experience.

BpH provides Lifestyle Wealth Management, this describes and approach to managing wealth that encompasses a full understanding of you, your family and your life before we look at how to organise your money. We focus on three simple ideas when building a portfolio:

Structuring a robust and highly diversified portfolio that suits the needs of a specific client. Minimising financial and emotional costs and keeping the risk of the portfolio where it should be.

We have a systematic and disciplined approach to investing, with a goal to capturing the asset class returns over the longer term rather than trying to beat the market in the short term. We do this by recommending a strategy of global diversification, careful asset allocation and disciplined rebalancing. This means less buying and selling which in turn reduces the cost of investing.

We start by having a mutual discovery meeting to understand you as a client and your needs and dreams. We then understand your current financial position and lifetime cashflow which helps inform the level of risk required.

When we understand what wealth means to our clients we help them deliver a clear plan to help them deliver the lifestyle they want.

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