A Referendum on your Financial Future

The Scottish Referendum is fast approaching. Whether you are of a political persuasion or not, the key question for most people seems to be: –

‘Will I be better off in an Independent Scotland?’

Unfortunately the answer is ‘We don’t know’, hence all the political debate.

There are some financial questions that have ‘We don’t know’ as their answer, such as: –

• Will investment fund X beat investment fund Y next year?
• Is it worth investing in Emerging Markets?
• Will Neil Woodford’s new fund perform well?

As none of us can predict the future we can’t answer these questions.

Is there anything we can answer? Professor David Blake, Director of the Pensions Institute at Cass Business School, recently published two working papers with some interesting conclusions: –

• ‘…the average equity fund manager is unable to deliver outperformance from stock selection or market timing, once allowance is made for fund manager fees…’
• ‘…the average UK equity fund manager does not add value relative to the benchmark once the fund management charges are taken into account…’
• ‘…there is no evidence that even the best performing fund managers can significantly out-perform the benchmarks after fund management charges are taken into account…’

How then can any investor decide how and where to invest their money if fund managers don’t add value?

Fortunately, there are some questions that can be answered which can significantly improve your investment outcomes: –

• How can I increase returns on my investments?

By paying less. Cost is the only certainty in the investment world. If it costs you more then you get less back. As Professor Blake evidenced, fund managers who charge more don’t outperform (on average).

• How can I reduce risk?

Whilst we cannot predict which fund, sector or country will perform the best next year, there are decades of evidence showing that stock markets work, they add value over the long term, and to reduce the risk of investing in the stock market it is necessary to diversify, as widely as possible, into not just tens of different companies, or even hundreds, but into thousands, across all sectors and global markets.

• Should I take more risk with my money in order to try and get higher returns?

There is a body of evidence showing what the ‘Risks worth taking’ are. For example smaller companies are riskier than larger companies, but the returns they give investors are proportionately higher than the increase in risk.

The Referendum, whatever the vote turns out to be, will have an impact, it’s just impossible to say exactly what the outcome will be. When it comes to investing, however, there are three things that should get your ‘vote’; diversify, keep costs low and only take risks worth taking.