Defining your role in investment success
Prices across all asset classes have been high for a while now, which may leave many of you wondering whether you should be making any investment changes. Long-term investment success requires a partnership between you, your advisor and your investment company via the investment manager.
The role of an investment manager involves selecting investments, which they believe will deliver the best returns within an appropriate level of risk. This mandate exists regardless of economic or market conditions. They do this by analyzing the expected return and risk and, if they take a valuation approach, searching for investments priced lower than their estimated underlying value.
As time passes, the market prices will begin to reflect the underlying value. This is particularly true if the markets are overvalued. When they are eventually corrected negative performance causes a permanent loss of wealth. In fact, purchasing undervalued investments means that most of the long-term outperformance across unit trusts comes from preserving an investor’s capital during times of negative market returns.
Prices within particular asset classes tend to differ while markets as a whole (property, bond or equity) can be quite expensive. The investments with the best value tend to be in unit trusts, which allows one to invest in multiple assets like stable and balanced funds. These funds allow investors to access different asset types to meet particular objectives. Now managers are able to avoid expensive assets or they can retreat to cash if everything becomes expensive. This eliminates the possibility of switching.
Then there are unit trusts such as Money Market or Equity funds, which invest in a single asset class. These funds require an investor to develop their own portfolio. This means you have to decide your asset class allocation, when you need to rebalance and when you need to switch. On average, stable and balanced funds are better for most investors, over the long-term, than Money Market or Equity funds.
So what is your role in this process?
Your role is to choose a unit trust you understand and can stay with. You should base your choice on the unit trust’s objective, not its recent performance. You must stay invested in your chosen unit trust long enough to reap the rewards. This means sticking with it through all the various market cycles. Therefore you need to pick an appropriate unit trust on offer from an investment manager you can form a partnership with, who you trust and whose approach you understand.
Appropriate obviously depends on your preferences and situation. Many investors like to hand over all aspects of decision-making. This sometimes costs less than creating your own diverse portfolio. Your choice of unit trust must be based your timeframe and risk appetite, which needs to balance with your investment growth.
Other investors may not have the time to pick particular investment, but prefer to have a hands-on approach to decision-making. Some investors can make good decisions, but typically an investor will destroy investment value by switching at the wrong time.
How to handle high asset prices
People tend to anchor themselves to past performance. They invest when an investment performs well and switch when thing they underperform. This can have a negative impact on your investment returns. You shouldn’t worry about high asset prices if you:
- Have a manager you trust and understand
- Are invested in a solution unit trust like a stable fund
- Have invested according to your long-term goals