Can we really beat the Markets?
Over the years, and because of the vast sums of money involved, top investment companies,
governments, national banks and academics have carefully studied the investment markets.
Consequently there is a vast body of research out there that carefully looks at investment
strategies, as well as the markets in general. So I’ve taken the trouble to sift through the
mountains of information, hints, tips, guides and strategies in order to produce this Top Ten
Tips of perceived wisdom.
1 Embrace Market Pricing – it know the worth of a stock
In 2016 there were 82.7 million trades every day across the world’s exchanges. That’s an
incredible £280Billion worth of activity, each done on the back of new information. The market
reacts to these trades like an enormous information processing machine, which in turn sets
the current price. As no one knows what the next trade or piece of information will be, the
future price is always uncertain. But in this uncertainty, the market price is always the best
indicator of a stocks actual value. To go against this would mean pitting yourself against the
collective wisdom of the marketplace.
2 Trying to outguess the market isn’t a sensible strategy
Whilst there is never a guarantee that any investment strategy will be successful, assuming
that you can identify mispriced stocks and take advantage of the low price is flying in the face
perceived wisdom. Research proves time and again, that market pricing works against
individuals and even mutual funds that attempt to outguess the market.
3 Past performance is no indicator of future positions
Whilst it may seem a prudent investment to select funds based upon track record, research
shows that there is strong evidence to avoid investing on this criterion alone. Think about how
much the world has changed in the past year or so, combined with how unsettled things still
are. Previous returns are from a different economic and political situation and may not be able
to be repeated.
Some fund managers may also be better than others, but past performance alone is not a
reliable indicator of future results, with some impressive past returns possibly being just down
to luck. The understandable assumption that past performance will continue unabated often
proves incorrect and can leave investors both puzzled and disappointed.
4 Play the long game and let the markets do the work
If you are intending to use the financial markets as a wealth creator, then the good news is
that the capital markets have always rewarded the long-term investor.
The markets are a manifestation of capitalism at work in the world’s economy. The great
news for investors is that historically, free markets provide a long-term return that offsets
inflation. You can see this in the growth in the performance of a £1 investment in UK small
cap stocks and value stocks over the past 50 years. A pound invested in the whole market in
1956 would be worth £1,000 in 2016; compared to £4,012 for value stocks and £7,643 for
small cap stocks.
5 Have a look at the woods as a whole, not just the trees
Academic research suggests that, instead of viewing the market opportunity in terms of
individual stocks and bonds, we should approach the market in a way that allows us to have a
broader view and identify investment ‘factors that have linked characteristics. Factors are
defined as any aspect of an investment that is backed by robust data, both over time and
across the market.
In Equity Markets the key factors would be size (small cap vs large cap), price (value vs
growth, momentum(the surge effect seen in rising markets)) and profitability (high vs low).
In the Fixed Income Market the factors would be term and credit quality.
If you decide upon a factor-based approach, then your returns will not be based upon which
stocks, bonds or market areas will outperform in the future. Your goal would be to hold a well-
diversified portfolio that emphasizes higher expected returns, controlled costs and a low
6 Fish in the wider oceans
Most people seem to only invest in their country’s stock market. In the UK this might mean
that they only ever pick UK stocks and mutual funds, yet still consider their portfolio to be
diversified. However, this limiting of the investment into one market can lead to problems with
possible implications to risk and return.
If you think about the uncertainty in the UK as we negotiate Brexit, then you may begin to
understand why diversifying out of the UK could be worth considering. Research suggests
that a global diversified portfolio should be structured to hold multiple asset classes, that
represent different market areas across the world.
7 Try to avoid bandwagons
It’s because we never know which market segments will outperform expectations that it’s
considered a good idea to hold a globally diversified portfolio, so that we ensure we are well
positioned to enjoy returns wherever they occur. As there is a strong case to support the
notion that investors should rely upon portfolio structure, rather than tempting market
movements, or the sudden rush towards a particular investment.
8 Keep your emotions out of your investments
If your strategy is to be in it for the long-term, then don’t let your emotions take over. A good
example of the dangers of letting your emotions rule can be seen in the 2008–2009 global
market downturn. Fear drove some investors to sell up and get out of the market.
Unfortunately for them, as the rebound began, they had already locked in their losses and
had to sit and witness the market’s climb back.
Understandably people can find separating their emotions from their investments a difficult
thing to do. As by their very nature markets go up and down, investors can find themselves
on a psychological rollercoaster. However an emotional reaction to any current market
condition may lead to a poor investment decision. Staying disciplined and sticking to your
strategy is crucial for long-term success.
9 Don’t believe all that you read in the papers
Newspapers don’t sell and television news isn’t watched unless there is some emotion and
sensation around what is being reported. Don’t let market commentary challenge your overall
If headlines start to unsettle you, try to maintain your longterm perspective. Sustaining a
growing portfolio and increasing your wealth has no shortcuts. It requires a solid investment
approach, a long-term perspective, and the discipline to stick to your strategy.
10 Stick to your plan – focus on staying on course
Always focus on the elements of your investment strategy that you can control and try to
avoid reacting to fluctuations in the markets. Work with your adviser to create and maintain a
long-term investment plan, based on market principles and informed financial research. Make
sure your plan continues to be tailored to your needs and goals. Structure your portfolio along
the dimensions of expected returns. Diversify globally and stay disciplined throughout the
various market conditions you will face.
As always this blog is written to enlighten and inspire you to consider the options available to
you. It is not meant to be financial advice. For that you are very welcome to contact us for a
free initial consultation.