24 Nov Successful investing is simple but NOT easy
Some of the most powerful ideas in life are simple.
One of the most important discoveries in the field of medicine to enhance people’s health is this idea that doctors and nurses must wash their hands! In the 19th century, Hungarian physician Ignaz Semmelweis discovered that the incidence of childhood fever could be cut drastically by using hand disinfectant in clinics. The fever was common in mid-19th-century hospitals and often fatal. Semmelweis proposed that hands should be washed with chlorinated lime solutions in 1847 when he worked in Vienna General Hospital’s First Obstetrical Clinic. Here, doctors’ wards had three times the mortality of midwives’ wards.
This simple idea has since saved countless millions of lives across the world. It made Semmelweis the early pioneer of antiseptic procedures and earned him the nickname ‘saviour of mothers.’
Another example is the important health advice to eat your five a day. Yet, there’s a multi-billion-pound industry borne out of our failure to heed this simple advice.
The investment industry is no different. A great deal of time and effort is devoted to creating complicated products that attempt to do the impossible. Sadly, most of them fail miserably.
Recent research by consultancy firm FinalytiQ looks at the performance of multi-asset funds sold to investors in the UK. The authors of the report concluded that the vast majority of multi-asset fund managers deliver worse risk-adjusted returns than a simple equity-bond market portfolio. And they charge clients very high fees for the privilege.
The report notes:
“The median annual fund charge for a multi-asset fund is 1.1% pa! And one in four of these multi-asset fund ranges have an OCF of 1.4% or more! This is before the platform fee and adviser charge. Once these are added, the total cost to the investor is north of 2.3%.
Cost isn’t a huge issue if multi-asset funds deliver an excess risk-adjusted return, over and above a simple market portfolio. Sadly, they don’t. Nearly all the multi-asset fund ranges underperformed against the benchmark market portfolio range over a five-year period. This wasn’t in one or two funds; it was at all risk levels over a three and five-year period.
This is just one of the many examples, where armies of very clever people create complex solutions that turn out to be disappointing.
The problem often comes from the fact that we confuse complex with effective. But the sooner we accept that investing doesn’t have to be complicated to be good, the better our investment experience will become.
At Tandem, we go the extra mile to make our investment process simple. We don’t attempt to shoot the lights out. Our approach is designed to help our clients capture global capital market return in the most cost-effective way.