Systematic, evidence-based investing often results in little activity in a portfolio. This is not the result of a ‘set-and-forget’ strategy. Considerable behind-the-scenes effort allows this state of calm consistency to exist.
Often when employing a professional or craftsman, you expect a little bit of action for your money but this generality does not always apply.
Take the case of a GP, for example, seeing a patient with a sore throat and flu-like symptoms. Today, many GPs feel under increasing pressure to come up with some ‘scientific’ solution to ailments – such as the prescription of antibiotics – and patients can feel cheated when the advice is simply to take paracetamol. Hopefully we do not doubt the training, experience and wisdom of the GP.
The same pressures apply to advisers when it comes to investing. Adopting an evidence-driven, systematic approach to investing can appear as if a portfolio, once set up, is left to roll on in a ‘set-and-forget’ manner.
When you open your valuation statement outlining your portfolio, it is likely to look largely unchanged, both in terms of its structure and the funds through which the investment strategy is implemented in practice.
One of these funds might to catch your eye if it has not done as well as the others, or the portfolio as a whole is down and it might be tempting to ask, ‘what are you going to do about it?’ The answer is probably going to be ‘nothing!’
As an existing client, you will now be familiar with us advising: to stay calm at times of market jitters; that we will rebalance your portfolio on a regular basis; that returns come from the markets; that costs really matter; that a sensible long-term, diversified portfolio structure is key and; to avoid looking at your portfolio too often.
Empirical evidence tells us this is what gives you the greatest chance of experiencing a good investment outcome. The seeming lack of investment activity on a portfolio from one period to the next, belies the considerable time, effort, discipline and fortitude that goes into achieving this for our clients.
The Cavendish Investment Committee sits at the heart of this effort and one central question drives its efforts: does the investment approach adopted still represent best practice globally, based on the latest academic research and theory available to us?
That is a big question, which takes quite a lot of answering and there are many layers to it. One risk to any thesis is that of confirmation bias, which is where one selects evidence that fits – rather than challenges – the thesis. An important point to note is that the overriding goal of Cavendish is to do what is in a client’s best interests, not to defend systematic, evidence-based investing as the only way to invest money, now and forevermore.
The Investment Committee is always open to challenge of the status quo. That said, the evidence is highly compelling and any changes down the line are likely to be evolutionary, rather than revolutionary.
Doing nothing is usually the right thing to do
Investment theory, academic research, empirical evidence and robust primary thinking provide the the fortitude required to run a long-term, strategic and systematic approach to investing. Without this deep certainty and quiet confidence, the noise, excitement and sometimes pain faced by investors can result in too much action, much of it inevitably of the knee-jerk, emotional variety.
It takes strength to stay calm at times of market crisis, to remain invested and to rebalance the portfolio, if necessary. It takes discipline not to chase ‘hot’ parts of the markets (bitcoin, gold, tech stocks, China etc.) or ‘hot’ managers, or to restructure the portfolio to take advantage of or avoid short-term opportunities and challenges (Brexit, China trade wars, low yields on high quality bonds). It takes courage not to give up on certain parts of the diversified portfolio that happen to be suffering at present.
It is challenging to quantify the peace of mind and solid financial foundation that your adviser delivers. Their advice to stay invested during difficult periods or to take no action at all might not show on a personal statement but the impact on your financial position is valid. The Investment Committee continues to paddle furiously behind the scenes to allow this be the case.