Within the investment world there is much debate about what the best investment strategy is.
There are many layers to this debate depending on the type of investments involved. Even looking at an asset class such as equities, there are lots of potential strategies all of which can seem just as convincing as the next.
For example, equity strategies include active, passive, smart beta (which is a hybrid of active and passive), value, growth, income, and momentum just to name a few.
Each of these strategies has its own merits and it is easy to argue one over the other. However, an impressive track record, a clever trading strategy or a convincing story means little if an investor cannot stick to the strategy in question.
“The best investment strategy is, the one you can stick with”.
To illustrate this more clearly, consider an investment of £10,000 into Netflix ten years ago. Though not a particularly realistic strategy, it would have been one of the greatest stock market investments of the last ten years, giving you a total return of 5,951% and a current value of £605,141!
However, it is very unlikely an investor would have realised this return due to what they would have had to experience to get there.
For example, your investment of £10,000 into Netflix in June 2009 would have grown over seven-fold to £72,314 by July 2011. Over the next year Netflix lost 800,000 subscribers due to a subscription price hike which caused analysts to downgrade future expectations for the company. As a result, over the next year your investment would have shrunk by 82% leaving you with just £13,023 by the end of September 2012.
If somehow, despite this mammoth loss, you had the resilience (or madness) to stay invested, by December 2015 your holding would grow to £221,861. Over the next two months it would fall by £81,573 as investors worried about slowing subscriber growth and increased competition, leaving you with £140,288.
In fact, over the entire ten-year period you would have experienced twenty-four separate drawdowns (falls) of greater than 10%, with nine of these being over 20%. Imagine seeing your investments fall 20% nearly every year! In fact, despite having a total return of 5,951%, today you would still be down circa 15% since the stock’s peak value in July 2018.
Source: Yahoo finance, Data compiled by Taylor Money.
In summary, despite Netflix turning out to be one of the best-performing stocks of the last decade, it is likely most investors wouldn’t have seen these returns as they would have sold out at some point along the way.
The lesson? An investment strategy you can stick with will always outperform one that you can’t. Constantly switching to the next best thing or what has done well in the last year only chases performance which has already been and gone.
We believe investment strategies you can stick with have the following features:
- Realistic return expectations
If the strategy is meant to be cautious, then you should expect cautious-like returns. You cannot expect a cautious investment strategy that is steadier and less volatile to keep up with a single equity market index and therefore comparing the two is pointless.
- The allocation reflects the desired level of risk
If you’re a cautious investor, then your investment strategy should be cautious. Being invested in an asset allocation that matches your risk tolerance increases the chances of sticking with it during more volatile markets.
When an investment strategy is properly diversified, if one part of your portfolio isn’t performing well, usually another part is doing the heavy lifting and balancing it out. As returns come from different parts of the portfolio at different times, this helps smooth the overall return profile making it a far more palatable journey.
- Have a goal, objective or time horizon attached
By attaching an objective to your investment strategy, you can put short-term performance into perspective by refocusing and reminding yourself of your longer-term goal.
The average investor is far more likely to be successful if they adhere to a strategy that displays the features above. In turn, selecting and sticking with an appropriate strategy increases your chances of achieving your long-term goals and objectives.
General Disclosures: This article is based on current public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.