Sometimes reading the money pages of the weekend papers can bring you to laughter or tears from the most unlikely sources. One headline from the 2nd page of the Saturday Telegraph Money section stated, “Ignore share tips from analysts” citing a study from Bocconi University in Milan. (The full web article is here; http://www.telegraph.co.uk/investing/shares/dont-listen-analysts-want-make-money-stock-market-report-finds/).
Researchers found that over the past 35 years the top 10% of US assets most lauded by analysts earned an average return of 3%. Looking at the 10% of US assets that analysts were most pessimistic about yielded as much as 15% per year.
As an IFA, I find this interesting, even amusing but not surprising, as modern portfolio theory suggests that stock picking is a poor way to make an investment return. The key drivers for investment returns suggested by portfolio theory are time in the market and diversity, none of which have anything to do with stock picking, and much more to do with getting into the market early and spreading your money thinly.
The web article offers the suggestion that analysts are too preoccupied with trying to find the next Google, so allow early high growth to make them over-optimistic in the longer term. Prof Gennaioli suggests that this is just another example of creating poor outcomes out of limited data, as suggested by the dynamics of behavioral economics.
Taking us back to the practical application for investment, I and other IFAs would suggest that chasing short term gain by stock picking is a fool’s errand. You will make more over time by being systematic and patient, not chasing fashion or the latest guru’s pronouncements.
As a company, we build diversified portfolios for our clients that have been designed around a volatility target, rather than a growth target, as we consider that not losing wealth is more important than chasing it. Think of it as a variation of looking after the pennies and the pounds will look after themselves. Finding a broad spread of businesses that are robust and will produce consistent returns is much more effective than trying to find a few unicorns.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.