A monthly voice from the past, considering the future
A couple of years ago I wrote a weekly blog in my role as the CEO of FoxPlan. I realised my readership was limited to graduate applicants looking to enhance their prospect for employment by feeding me back the most recent iteration plus a select few interested parties. So, I stopped writing, and no one complained!
With 12 months to go until I depart from FoxPlan the current MD has suggested both clients and staff might enjoy reading an old hands perspective of current events as they pertain to various aspects of our transitioning profession – with relevance to client outcomes.
A monthly voice from the past, considering the future.
Richard Meadows wrote an excellent article on the late Jack Bogle in The Sunday Star Times on the 27th of January. Investors and advisers new to investment should read that article. Jack Bogle was the founder of the Vanguard Group – the second biggest investment firm in the world. It wasn’t always so because its beginnings came up against tradition, bias, competition and the Wall St establishment. Fundamentally Jack Bogle’s philosophy was founded on low fees and the minimising of human interference (fund manager active management) a passive approach to investing, Richard Meadows – I quote, “The passive investing revolution is only just starting to hit its stride in New Zealand. We can’t get those rock bottom 0.05% fees yet, but the middlemen selling Vanguard Funds - Simplicity, Superlife, Smartshares – can get us in the realm. It’s a huge improvement”.
I don’t disagree in principle to the Richard Meadows assertions. I certainly support the Vanguard philosophy of passive investment and reduced fees. In my experience however, there are a couple of fundamental considerations which he doesn’t highlight, and they are critical (by way of transparency – FoxPlan uses Vanguard funds in both KiwiSaver (Booster) and Investment portfolios (Consilium).
Firstly – ‘The Pendulum of investor Psychology’ or ‘The Cycle in Attitudes Towards Risk’. In short, human beings are wired to react to both positive and negative cycles. The economic cycle, the government involvement with the economic cycle, the profit cycle, the credit cycle, the distressed debt cycle, the real estate cycle – in total ‘The Market Cycle’. In my experience the biggest influence on investment outcome is investor behaviour; not fees or fund manager. Plain old fear or euphoria, as markets do their normal thing – but to the average investor market gyrations are far from ‘normal’. An adviser’s role is critical to ‘peace of mind’ when the media is screaming Armageddon and fund balances look to be in free fall. An adviser’s role is just as critical when investments are shooting the lights out and people are prone to rushing onto the bandwagon (finance companies, tech stocks, crypto currency, real estate).
But don’t trust my bias as a financial adviser who wants to be paid for giving good, professional balanced advice and has done so for 44 years. Check the facts – the best source – Dalbar and Lipper. You will find a mismatch between market returns and investor returns – and unfortunately DIY investors, especially investors using index funds such as ETF’s. The options that Vanguard provides are the most negatively affected when the ‘markets’ create nervous nellies out of raging bulls. And when the opposite occurs, I refer to the hypnotism of booming markets as the investor’s equivalent to nitrogen narcosis – the euphoria of the deep – it kills divers and certainly did so financially to many finance company direct investors just prior to the Global Financial Crisis. Those investors who remained invested in well diversified funds over the last 10 years following the global financial crisis have been well rewarded for their patience and trust – in most likelihood because someone held their hand through the most tumultuous time in market history since the Great Depression.
Second critical fundamental - ‘Asset Allocation’
Market performance is volatile – history is our only true measure, however ‘probability under uncertainty’ is a reasoned and rational consideration. Risk and return are related, and growth assets have outperformed fixed income assets over all decades of time. Shares in companies and commercial property are ‘growth’ assets – bonds and money market cash funds are ‘defensive’ assets. Equities (shares in companies) have exceeded inflation by 7% over all recorded history – in every decade (including the 1930’s).
I referred to the pendulum of investment and its psychological impact on investors – as with the pendulum of a large Grandfather Clock – the pendulum is seldom at the median. It is swinging from ‘underperformance’ to ‘outperformance’. But we know if the pendulum keeps swinging – the clock will tell us the correct time. The same for asset classes. Over time their performance and that of inflation is measured, consistent and ultimately reverts to mean.
But just as the temperature and weather in Singapore is likely to experience less highs and lows than Christchurch, the median can be the same.
Asset class returns (US based*) – Historical average
*All democratic countries have a similar pattern, but I quote US for two reasons. It makes up nearly 50% of the worlds capital markets and it has records dating back to pre ‘Great Depression’.
Equities 12% (Small Cap)
Equities 10% (Large Cap)
Fixed Income 6% (Bonds)
Cash 4%
Inflation 3%
Investors need a plan to achieve investment outcomes and a portfolio most likely to achieve same. Both these functions are a product of advice. A robot will not hold your hand through the next crisis.
Jack Bogle and Vanguard gave us the product, but advisers trained in the art and science of investment and financial planning are important members of the team for clients to maximise destination achievement and give peace of mind through the journey. Fees are important and a measured consideration but nothing in comparison to the 6% gap between average market performance and average market investor performance.
At FoxPlan our aim is to achieve market performance for our clients and to design investment portfolios which under a lifetime of uncertainty and market cycles are most likely to achieve planned outcomes.
Next Month: insurance reform and the political bandwagon
John Killick