Investment Bulletin – June 2010

The ‘advice’ in the financial pages of the press are a constant source of frustration and annoyance. Rather than providing any useful advice regarding the construction of a sensible investment portfolio, virtually every weekend we see articles telling readers how to adjust their portfolios to benefit from what may have happened politically or economically in the preceding seven days.

The main point to bear in mind is that these articles are arguably not written for the benefit of investors, but to provide eye-catching headlines to sell newspapers. If the financial press were trying to provide genuine guidance, they would have to write the same article every week (i.e. tell their readers to diversify, not to take any more risk than they can tolerate, rebalance regularly and otherwise sit tight for the long term). However, we admit that this would not sell very many newspapers.

Very recently, a well-known but unnamed Sunday publication ran an article advising their readers to do the following –

Sell gilts and buy blue chips, sell corporate bonds and buy income funds, sell retailers and buy supermarkets, sell emerging markets and buy the US, sell metals and gold and buy agriculture, sell banks and property firms and buy tobacco, sell oil consumers and buy oil producers, sell green and buy nuclear, sell the euro and buy the dollar, sell defence and buy infrastructure

We believe that the following would be a much more sensible approach –

No-one can predict the future, therefore do not try

There is a major difference between short term speculation and long term investment. The bad news is that no-one can predict the future but the good news is that, in order to have a successful investment experience, there is no need to do so.

Adopt & maintain a sensible, structured, long term strategy

Restrict risk to an amount that you can tolerate and allocate your capital to tried and trusted asset classes. These allocations should be based on long term evidence rather than short term predictions of the future.

Rebalance the portfolio each year

This brings the portfolio back into line, ensuring that you are only exposed to the amount of risk that you bargained for and has the effect of trimming off your holdings in the ‘winners’ and buying more of the ‘losers’. Disciplined rebalancing can be shown to reduce risk and enhance returns.

Keep costs to a minimum

Other than rebalancing, trade as little as possible as every transaction creates a cost and costs matter.

Avoid the latest fad investments

There have been any number of new-fangled investments that were offered by the marketing departments of investment houses only to disappoint (e.g. technology funds, absolute return funds). The marketing departments then simply move on to the next new idea, leaving investors out of pocket. We will seek to ensure that you are not caught out by these fads.

We believe that it is our role to sift through the ‘noise’ that is generated in the media and to provide you with long term investment strategies to enable you to achieve your financial planning objectives. We are available to discuss anything that you may have read in the financial press at any time.

Should you have any queries regarding any aspect of this bulletin, please do not hesitate to contact your BRB adviser.

BRB Independent Financial Advisers Ltd.