“Someone is sitting in the shade today because someone planted a tree long ago.”
As investor and philanthropist Warren Buffett alludes to in this quote, the actions you take now will have implications for years, even decades, to come. We all know it’s easy to keep putting off what are seemingly big decisions, so we’ve outlined some compelling reasons to take action to improve your investment portfolio now.
1. Ensure you’re invested sensibly so you can feel “comfortable” during the next market correction
The word “comfort” is an interesting one to use here. Can anyone truly feel comfortable when their life savings experience a significant fall in value? Experience tells us that while rare, this is possible. Some people understand it to be a good thing as it gives them the chance to have a hunt under the mattress for some spare cash to go sale shopping. If you buy a broad portfolio of globally diversified holdings, a market decline presents an opportunity to buy more for your money.
In contrast, an investment approach that seeks to pick winners (stocks that may outperform the market) runs a high probability of unintentionally picking losers instead. As was seen last year, no-one can predict with any certainty what’s around the corner. Those that have grabbed headlines for making some lucky calls have also selected some stocks that haven’t performed well, netting off some, if not all, of the benefit. This leaves you vulnerable as the relatively small number of holdings you have could decline in value and may never recover.
By investing in a diversified portfolio, you can minimise the risk of individual stocks performing badly or even failing. This is because the impact is smaller when your portfolio holds close to 20,000 different companies. You can read more about the benefits of diversification through market corrections in our article from May 2020.
2. The longer you remain in expensive investments, the more you’re eroding your wealth
Nobel prize winner Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Compounding the effects of positive returns over the long term is certainly one of the best ways to build your wealth. In contrast, the fees you pay to invest your money will erode your wealth, effectively transferring it to the investment managers. There isn’t a way to invest your money for free – it’s a service and there’s an associated cost – but it’s important to keep these costs to a minimum.
Evidence shows that, after costs, only around 1% of active fund managers outperform the market1. Knowing in advance which fund managers these would be requires a very accurate crystal ball. But costs are something you can control and keeping the costs of investing to a minimum is an important element in a successful investment strategy, leaving more of your wealth for you and your family to enjoy.
3. Your money can be a force for good
ESG (environmental, social and governance) investing is a responsible investment strategy that seeks both strong financial return and positive change. The philosophy is underpinned by three pillars which, when combined, amount to what most would consider good business practice.
- Environmental – producing more output with less natural resources, such as energy, water, waste and pollution
- Social – improving relations with key stakeholders including employees, customers and suppliers
- Governance – reducing risk through board oversight and risk controls.
What’s exciting is, with the evolution of available investment solutions, it’s now possible to incorporate ESG concerns into an established investment strategy.
It makes sense that ESG screening has a positive impact on company performance. Strong ESG practices help to reduce risks to a business and allows us to avoid investing in companies that become stranded due to changing environmental regulations, while seeking out those with solid potential.
Our approach to investing both our own and client money combines more than six decades of market data, Nobel-prize-winning academic research and behavioural finance. We’re pleased to be able to bring this philosophy together, to screen out some of the worst offending companies on the planet, while potentially enhancing the long term returns for your portfolio.
In the words of Sir David Attenborough: “It’s surely our responsibility to do everything within our power to create a planet that provides a home not just for us, but for all life on Earth.”
Please note, the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
1 Source: David Blake, Tristan Caulfield, Christos Ioannidis and Ian Tonks (2015) ‘New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods’.