Stockspot recognises that the most important investment decision is choosing how much to put in each asset class, rather than trying to pick winners within an asset. As a general rule, diversifying into more assets in your portfolio will reduce the amount of risk you need to take to achieve higher returns.
Asset classes have different risk profiles. Share prices are volatile but if the economy grows shares may outperform other asset classes in the long run. On the other hand government and corporate bonds provide safe and steady income but little capital growth. Investing overseas means that not all your investments are exposed to the Australian economy. Investing in emerging market countries provides the opportunity to share in their growth.
|Australian shares||The top 300 listed companies on the ASX including Telstra and BHP.|
|Global shares||Some of the worlds largest companies like GE, Toyota, IBM & Apple.|
|Emerging markets||Companies from fast growing economies like China, India and Brazil.|
|Bonds||Government and corporate bonds provide reliable fixed interest returns.|
|Gold||To protect your portfolio against inflation and volatility.|
We provide you with a blend of these five asset classes which best corresponds to your goals and personal financial situation. We allocate the percentage of each asset class in your portfolio using Mean-Variance Optimisation, the foundation of Modern Portfolio Theory. The economists who developed this, Harry Markowitz and William Sharpe, received the Nobel Prize in Economics in 1990. Today it is the most widely accepted framework for managing diversified investment portfolios.
Beyond these 5 assets it is difficult to improve a portfolio further especially when you incorporate transaction costs. However Stockspot also offers Themes for clients who want to personalise their portfolio with a range of other investment options including socially responsible shares or dividend shares.
Stock picking is difficult for one simple reason: It is now too competitive because there are too many smart fund managers trying to beat each other.
Today about 90% of the trading in markets is done by professionals. The price movement of individual shares is mainly caused by fund managers trading against each other. This is a ‘zero sum game’ which means that for every winner there is also a loser. On average, fund managers just earn the market return minus their fees.
This wasn’t the case in the 1970s when there was only 5,000 fund managers in the world, today people have better and faster access to information and over 1,000,000 professionals actively managing money. New information gets reflected very quickly into stock prices. News that everyone knows is already baked into share prices and new news is factored in almost instantaneously. This is why professional fund managers have on average performed worse than the market since the 1990s.
That doesn’t mean that some professionals don’t have a good run. Fund managers can often have a great streak of success, but performance tends to ‘revert to the mean’ over the long run. A period of good relative performance by a fund manager is often followed by a period of poor relative performance.
Fund managers struggle to stay on top for an extended period, as most favour a certain investment style (like value or growth) and these styles come in and out of favour. Because of investor return-chasing behaviour, top performing funds tend to attract the most money after good performance and just before they start to lag. The same happens with ‘hot’ asset classes or sectors of the market – inflows tend to be largest at the top which is exactly when they should be avoided.
This is why Warren Buffett, the most successful active share investor of all time, says people should not pick stocks anymore or pay fund managers to pick stocks. Buffett recommends index investing and so do we.
The average active fund manager takes additional risk to try and time the market or pick the right shares. We don’t try to beat the market. Instead our investment strategies track a broad range of global assets to generate long term returns and reduce risk via diversification.
Our clients get access to balancing funds to help smooth returns and avoid the temptation to chase markets when they are at the top of their cycle and most risky.
We methodically rebalance portfolios to keep risk consistent and continuously educate clients on ways to remove emotion from their investing. By understanding their own innate biases, clients are less likely to act on impulses and fall into the common traps of over-trading, paying high fees, chasing returns, or panicking when the market falls.
Fund managers as a group have average performance, so paying them large fees destroys your long term earnings potential. Paying 2.5% in costs each year means 75% of your potential returns are paid to the funds industry over your lifetime.
The investment industry wants you to buy and sell out of stocks or pay active fund managers to do the same.
But every cent you pay comes out of the returns you could have earned for yourself.
Like Warren Buffett, we don’t suggest stock picking and instead recommend low cost index funds. We believe keeping our clients’ costs low is key to long term investment success. The funds we recommend charge approximately 0.25% per year which leaves more money in our client's pockets.
Stockspot does not earn fees from, or have a commercial relationship with the funds we recommend. We don’t pay commissions or provide benefit to professionals who recommend Stockspot’s service to their clients. All benefits go to you, the end client. Our only job is to grow your wealth over the long run.
Try it now and see what portfolio we recommend for you.Get started