The investment industry is known for its different approaches. Some are more controversial than others. One of the more controversial viewpoints is between what we call an ‘active’ and a ‘passive’ investment approach.
Those who support ‘active’ investing believe they can beat the market by buying and selling at the right time. ‘Passive’ investors on the other hand follow a ‘buy and hold’ strategy that minimises buying and selling and therefore shields investments from dramatic rises and falls.
I believe that a passive investment strategy produces superior, risk-adjusted returns, based on a simple mix of equities and bonds, in appropriate deciles and on a market capital weighted basis.
In short, a global ratio of 60% equities and 40% bonds does exactly what it says on the tin. I can plan effectively for a client based on how I expect that portfolio to behave. Or any other ratio of equities to bonds, depending on what the client is hoping to achieve.
However, some aspects of passive investing are too extreme. Completely buying and holding, and sitting back no matter what’s happening in the world never sat right whilst we had not squared the circle that was Sequencing Risk. Sequencing Risk is the disproportionate effect a stock market crash has upon a retirement strategy in the first decade of drawing an income.
For that reason, any Barnaby Cecil client that retired in the last five years currently holds 100% in cash since March. My point to them has been, where is your upside if I am wrong? Clients close to or at retirement have built up a lifetime of capital and the precipice presents a greater risk to them than missing one more year of exceptional growth. Conversely, for anybody under the age of 40, we have left their investments untouched.
Like many aspects of life, the truth lies somewhere in the middle of two extremes. Such a centrist viewpoint means I usually disagree with some aspect of any argument laid before me. It doesn’t make you very popular.
I accept that markets decline, on average, by -15% per annum and you cannot trade on intra-year volatility, which is determined by news. News, by definition, cannot be known in advance. Therefore, select the most appropriate risk adjusted and low-cost strategy, in accordance with the client’s objectives and rebalance periodically.
That’s our philosophy and it’s held us in good stead. Our clients are happy, their wealth is protected and everyone is on track.
*Post script: 14.12.2020
I am incredibly proud of how we managed volatility during this period for all clients and particularly for those who were close to or at the commencement of their retirement plans. Three of which have been kind enough to allow us to share their live performance data (names redacted). Drop me a line and I would be happy to share with you the performance data. Tom.