October 2023 Newsletter
Investing and prospering for the long term
We have had a lot of questions recently about long term investing so below is a newsletter from Christoph sharing his wisdom and research.
What do you do when you invest for the long term, such as your superannuation, inheritance, settlement or income?
You could buy property, and outside of super that is often a good idea, but there are many situations where something other than property is a more suitable investment and assisting with such decisions is something we do multiple times a day.
Interestingly, a senior banker Jan Loeys of JP Morgan Chase, the most valuable bank that is quoted on a stock exchange in the world, has been asking the same question and came up with a very good answer: Keep it very simple because doing everything else reduces your expected returns.
That is a surprising opinion to come from a bank where tens of thousands of employees sell complex investment products to the general public with the profit for the bank being in the complexity.
Jan Loeys’ recommendations need to be a bit modified for the Australian market but in essence apply: Buy an investment fund that contains shares from the whole world for long term growth and dividends and buy an investment fund of bonds in your local currency (here Australian dollars). That’s it.
For Australian investors it makes sense to be overweight in Australian shares (to have a bigger allocation to Australian shares) because we are heavily tax advantaged when Australian tax payers buy Australian shares but otherwise the recommendation holds.
Why is this a good strategy?
You buy shares for long term growth and dividends but most of the long term growth in the past has come from only a few companies and it is impossible to know which will be those few companies ahead of time. Buying the entire market makes sure those big winners will be in your portfolio. I also add some emerging market shares as they are not well represented in whole world share funds.
For bonds it is a good idea to buy a fund that invests in bonds in your own currency and to prefer company bonds rather than government bonds as government bonds give lower returns most of the time.
There has been a huge amount of research on strategies that increase long term share returns and many of them worked until 5-10 years ago. Examples are value vs growth, small companies vs large companies, momentum, liquidity and many other strategies. Jan’s experience with all of the JP Morgan research expertise behind him has been that these strategies stopped working recently because everybody has the same information now so any company that looks like it will outperform will be bid up to a level where it stops outperforming and any company that looks as if it will do worse will be sold until it stops underperforming.
There is a lot more detail to the above and a lot to observe. For example industry funds heavily rely on a liquidity premium which means they buy a lot of illiquid assets, i.e. direct assets such as buildings, harbours, toll roads, airports etc in the hope that these will do better than liquid assets. There is a further, large benefit for the managers of industry funds as they can value such assets much more freely at times that suit them than if they buy a share where the value of the share is known every day.
Another example is private equity, an investment strategy that buys companies that are not listed on any stock exchange and therefore can be valued by the private equity managers. Reading the Financial Times I get the impression that superannuation and other fund managers like private equity not because it gives better returns but because they give the illusion of smoother, less volatile returns, making private equity seem more valuable than it is.
One of the biggest determinants of long term returns is the ability for an investor to “hold their nerve”. This means to invest and to sell when it suits the investor and not to be influenced by others because the media will tell you to sell at the worst time – when things are cheap because there is a lot of bad news – and to buy at the worst time – when shares have done very well and everybody is optimistic for the future and therefore happy to buy expensive shares. Trying to time the market, i.e. to buy when people are afraid and to sell when people are buoyant only works for a few people who can accurately gauge the market but even such people eventually can make a very big mistake.
The key is to invest simply, in a way that suits you and to be able to hold your nerve. It looks very simple and is very different from property where your ability to evaluate and manage a property makes a big difference.
Please feel free to contact me at any time in relation to your investment, insurance or any other financial matters.
With love from the Team at In Your Interest Financial Planning
Christoph, Nicola, Marian, Deryk, Ann-Marie, Jessica, Alvin, Jade and Lin
Dr Christoph Schnelle
Financial Adviser and Life Insurance Specialist
Insurance ● Investment ● Super ● Retirement ● Aged Care
LRS GradDipFinPlan FAAA Member
Life Risk Specialist | SMSF Specialist Advisor
PhD Health Sciences and Medicine
MBiostats | GStat Graduate Statistician
Accredited Aged Care Professional
Accredited Estate Planning Professional
Authorised Representative 308223