In this article by Trustnet, private investors have yet again demonstrated their tendency to rely on past performance as the main factor when choosing investment funds. This is despite the warnings issued by the Financial Services Authority and the substantial body of evidence which shows how ineffective a method of selection this is.
The problem is that private investors use the same method for buying investments as they do when they buy anything else, such a car or a washing machine. They look up the specification, the performance characteristics and then they choose the one with the best performance. Unfortunately there really is no link between past and future performance, even for the so called better or 'top quartile' funds. Research has shown that the level of persistence of good performance amongst fund managers is so low as to make it pretty much a worthless exercise trying to choose on that basis.
Private investors, unfortunately also also succumb to the marketing hype issued by fund management companies, and believe that they can outperform the markets purely through the clever active management strategies adopted by their fund managers. The truth is that the majority of fund managers are barely able to achieve performance comparable to the markets in which they invest and most usually fail miserably. For this, active fund managers charge extra.
One particularly sad truth about this is that all too many financial advisers have failed to grasp the reality of investment and continue to peddle active strategies, despite the evidence to the contrary.
Smart investors concentrate on getting the asset allocation (the split between equities and bonds/cash) right and then invest via trackers and passives. They recognise that the only way in which to outperform the market is to take more risk, not to try and outfox it using the same information as is available to everyone else.
Smart investors adopt an Evidence Based Approach to investment!
Chris Wicks CFPI help you achieve your lifetime goals for reasons that are important to you
Saturday 19 March 2011
Sunday 30 January 2011
Is it possible to choose investment funds using past performance data?
Standard & Poors, a major fund rating agency has recently carried out research into tthe extent to which funds which have performed well in the past go on to doing so in the future.
The issue here is not whether active funds are capable of doing well. Some, undoubtedly are capable of generating good returns. The problem, as shown by the Standard & Poors, is that very few of the good performers go on to repeat their previous performance.
So what does this mean to private investors? For one thing it indicates that trying to build your portfolio using actively managed funds, no matter how much time and effort you or your adviser puts into choosing them, is likely to be a complete fools errand. You are likely to pay more for something (out performance) that you are very unlikely to get. In addition, if you are regularly swapping one fund for another on the strength of the poor performance of funds that you already hold in favour of ones that have done better over the same period, you will just be incurring extra costs and most probably spending time out of the market. This is one of the main reasons why large numbers of private investors substantially under perform the markets in which they invest.
The answer is to avoid the uncertainty and extra costs caused by active fund manager selection and instead to build the portfolio through index trackers and passive funds. This is, of course, the second step in the construction of a portfolio. The first is to ensure that you have adopted the correct asset allocation for your needs.
Chris Wicks CFPI help you achieve your lifetime goals for reasons that are important to you
The issue here is not whether active funds are capable of doing well. Some, undoubtedly are capable of generating good returns. The problem, as shown by the Standard & Poors, is that very few of the good performers go on to repeat their previous performance.
So what does this mean to private investors? For one thing it indicates that trying to build your portfolio using actively managed funds, no matter how much time and effort you or your adviser puts into choosing them, is likely to be a complete fools errand. You are likely to pay more for something (out performance) that you are very unlikely to get. In addition, if you are regularly swapping one fund for another on the strength of the poor performance of funds that you already hold in favour of ones that have done better over the same period, you will just be incurring extra costs and most probably spending time out of the market. This is one of the main reasons why large numbers of private investors substantially under perform the markets in which they invest.
The answer is to avoid the uncertainty and extra costs caused by active fund manager selection and instead to build the portfolio through index trackers and passive funds. This is, of course, the second step in the construction of a portfolio. The first is to ensure that you have adopted the correct asset allocation for your needs.
Chris Wicks CFPI help you achieve your lifetime goals for reasons that are important to you
Sunday 14 June 2009
Two Professors of Finance discuss the future of the markets
In this clip Dean of University of Chicago Booth School of Business Edward Snyder and Professor Eugene Fama discuss common questions on the efficient markets hypothesis, the credit crisis, and the business of business schools.
The topics discussed are core to our understanding of how the markets work and therefore the way in which we construct portfolios. The clips lasts just under an hour but it is time well spent for anyone interested in hearing an academic rather than a marketing hype view of how the markets work.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
The topics discussed are core to our understanding of how the markets work and therefore the way in which we construct portfolios. The clips lasts just under an hour but it is time well spent for anyone interested in hearing an academic rather than a marketing hype view of how the markets work.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
Thursday 11 June 2009
Wednesday 10 June 2009
Active Fund Management is a Zero Sum Game
In this video, Professor Kenneth French explains about why active fund management is always doomed to under-perform the market.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
Tuesday 9 June 2009
A step by step approach to producing a financial plan
Financial planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a home, saving for your child's education, planning for retirement or estate planning. The financial planning process consists of six steps that help you take a "big picture" look at where you are financially. Using these six steps, you can work out where you are now, what you may need in the future and what you must do to reach your goals.
The Benefits of Financial Planning
Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you pay off your mortgage faster or it might delay your retirement significantly. By viewing each financial decision as part of a whole, you can consider its short and long -term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.
Can You Do Your Own Financial Planning?
The simple answer is yes. Some personal finance software packages, magazines or self-help books can help you do your own financial planning. However, you may decide to seek help from a professional financial planner if:
• you need expertise you don't possess in certain areas of your finances. For example, a planner can help you evaluate the level of risk in your investment portfolio, adjust your retirement plan due to changing family circumstances or provide tax advice that will contribute to the planning process.
• You want to get a professional opinion about the financial plan you developed for yourself
• You don't feel you have the time to spare to do your own financial planning.
• You have an immediate need or unexpected life event such as a birth, inheritance or major illness.
• You feel that a professional adviser could help you improve on how you are currently managing your finances.
• You know that you need to improve your current financial situation but don't know where to start.
How To Make Financial Planning Work For You
You are the focus of the financial planning process. As such, the results you get from working with a financial planner are as much your responsibility as they are those of the planner. To achieve the best results from your financial planning arrangement, you will need to be prepared to avoid some of the common mistakes by considering the following advice:
Set measurable goals.
Set specific targets of what you want to achieve and when you want to achieve results. For example, instead of saying you want to be "comfortable" when you retire or that you want your children to attend "good" schools, you need to quantify what "comfortable" and "good" mean so that you'll know when you've reached your goals.
Understand the effect of each financial decision.
Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. A decision about your child's education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are interrelated.
Re-evaluate your financial situation periodically.
Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to reflect these changes so that you stay on track with your short and long-term goals.
Start planning as soon as you can.
Don't delay your financial planning. People who save or invest small amounts of money early and often, tend to do better than those who wait until later in life. Similarly, by developing good financial planning habits such as saving, budgeting, investing and regularly reviewing our finances early in life, you will be better prepared to meet life changes and handle emergencies.
Be realistic in your expectations.
Financial planning is a common sense approach to managing your finances to reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control such as inflation or changes in the stock market or interest rates will affect your financial planning results.
Realise that you are in charge.
If you're working with a financial planner, be sure you understand the financial planning process and what the planner should be doing. Provide the planner with all of the relevant information on your financial situation. Ask questions about the recommendations offered to you and play an active role in decision-making.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
The Benefits of Financial Planning
Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you pay off your mortgage faster or it might delay your retirement significantly. By viewing each financial decision as part of a whole, you can consider its short and long -term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.
Can You Do Your Own Financial Planning?
The simple answer is yes. Some personal finance software packages, magazines or self-help books can help you do your own financial planning. However, you may decide to seek help from a professional financial planner if:
• you need expertise you don't possess in certain areas of your finances. For example, a planner can help you evaluate the level of risk in your investment portfolio, adjust your retirement plan due to changing family circumstances or provide tax advice that will contribute to the planning process.
• You want to get a professional opinion about the financial plan you developed for yourself
• You don't feel you have the time to spare to do your own financial planning.
• You have an immediate need or unexpected life event such as a birth, inheritance or major illness.
• You feel that a professional adviser could help you improve on how you are currently managing your finances.
• You know that you need to improve your current financial situation but don't know where to start.
How To Make Financial Planning Work For You
You are the focus of the financial planning process. As such, the results you get from working with a financial planner are as much your responsibility as they are those of the planner. To achieve the best results from your financial planning arrangement, you will need to be prepared to avoid some of the common mistakes by considering the following advice:
Set measurable goals.
Set specific targets of what you want to achieve and when you want to achieve results. For example, instead of saying you want to be "comfortable" when you retire or that you want your children to attend "good" schools, you need to quantify what "comfortable" and "good" mean so that you'll know when you've reached your goals.
Understand the effect of each financial decision.
Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. A decision about your child's education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are interrelated.
Re-evaluate your financial situation periodically.
Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to reflect these changes so that you stay on track with your short and long-term goals.
Start planning as soon as you can.
Don't delay your financial planning. People who save or invest small amounts of money early and often, tend to do better than those who wait until later in life. Similarly, by developing good financial planning habits such as saving, budgeting, investing and regularly reviewing our finances early in life, you will be better prepared to meet life changes and handle emergencies.
Be realistic in your expectations.
Financial planning is a common sense approach to managing your finances to reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control such as inflation or changes in the stock market or interest rates will affect your financial planning results.
Realise that you are in charge.
If you're working with a financial planner, be sure you understand the financial planning process and what the planner should be doing. Provide the planner with all of the relevant information on your financial situation. Ask questions about the recommendations offered to you and play an active role in decision-making.
Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you
Monday 8 June 2009
Keydata goes into administration
Subscribe to:
Posts (Atom)
Posts
