Systematic Investing: The Foundations of a Successful Investment Experience

As the old saying goes, “investing is simple but not easy”. It is simple enough to pick a few shares of well-known global companies to hold in an online brokerage account, yet it is not easy to know whether the portfolio you build is sensible, or that your portfolio will be able to meet the goals that you are aiming to achieve. Investing money well requires a logical and robust framework on which to build a lifelong investment programme. It needs to be grounded in investment theory, supported by empirical evidence and enhanced with an insight into the behavioural traps and pitfalls that all investors face. We have spent considerable time researching the theory and the evidence to come up with an investment programme that we fully believe in. FIVE INVESTING PRINCIPLES We start by looking at five guiding principles that provide the backbone for how we think about investing, rather than what we should invest in. 1. HAVE FAITH IN CAPITALISM AND CONFIDENCE IN THE MARKETS Investors need to keep faith in capitalism as a robust and resilient economic system. We need to recognise that the markets are an efficient mechanism for rewarding those who provide capital to those engaged in the pursuit of wealth creation. 2. ACCEPT THAT RISK AND RETURN GO HAND IN HAND One of the inescapable truths of investing is that to achieve higher returns, you have to take on more risk. Many risks exist but appropriate risk should not be feared, because it is the source of returns that investors seek. 3. LET THE MARKETS DO THE HEAVY LIFTING Trying to beat the market – through either market timing or stock picking – is a tough game, with very few winners. Therefore, we prefer to let the markets do the heavy lifting, which will take a great weight off your shoulders. You no longer need to worry about picking the right stock, the right manager or deciding if you should be in or out of the markets. 4. BE PATIENT - THINK LONG-TERM There is no short cut to investment success. Use the time on your side to capture the returns of the markets slowly, but effectively. 5. BE DISCIPLINED Combine patience with discipline. Stick to your plan and don’t be tempted to tinker, or chop and change. Discipline is key in successful long-term investment planning. FIVE INVESTING PRACTICES Having established a sensible set of investing principles, let’s turn our attention to five key investment practices that the evidence and theory suggest we should focus on. 1. BUILD A WELL-STRUCTURED PORTFOLIO Compiling a well-thought-out mix of different investments (referred to as asset classes) should sit at the heart of your investment programme. Successful investing is all about taking well-understood risks that deliver a positive return and, avoiding taking risks that add little to the portfolio. 2. USE DIVERSIFICATION TO MANAGE AN UNCERTAIN FUTURE No-one knows what the future holds and owning a highly-diversified portfolio, spread widely across asset classes, global markets, industry sectors and companies, helps make sure that systematic investors are prepared for whatever the markets throw at them. 3. AVOID COST LEAKAGE FROM YOUR PORTFOLIO Good investment performance can be wiped out by high costs. A systematic approach to investing incurs far lower costs over time than the average activelymanaged fund seeking to beat the market. 4. CONTROL YOUR EMOTIONS USING A SYSTEMATIC, DISCIPLINED APPROACH This keeps anxiety under control and removes irrational decision-making. Closing the gap between what reflective, patient and disciplined investors should earn from markets and what emotional, irrational and intuitive investors tend to earn is of enormous value. 5. MANAGE RISKS CAREFULLY ACROSS TIME Managing risks rather than performance means we avoid being blinded by returns. This can be achieved by rebalancing your portfolio back to its original agreed structure, reviewing the best-in-class fund choices and challenging and refining the approach where necessary. To summarise, at Albert Goodman Chartered Financial Planning we embrace the efficiencies of markets, their pricing and accept market returns, rather than trying to second-guess market movement. Our client’s savings represent years of hard work so it’s essential to remember that investors are likely to be best served by trusting the plan they have put in place, and focusing on the issues they can control. By owning a well-diversified portfolio, having faith in the markets, being patient and remaining disciplined, we are confident that the Albert Goodman Chartered Financial Planning approach will provide clients with every chance of successful investing. To view the Prosperity newsletter in full, please click here.