I have been giving some thought to any parallels between fashion and investing.
As we all know, fashions come and go and what was once considered fashionable may not be so now and it seems this pattern continually repeats itself.
Investing can sometimes seem a bit like this as over my career as a Financial Planner I have seen many different investing ideas come and go. With hindsight, some of these ideas may have been good and others not so good.
For me though the key difference between fashion and investing is that the principles which determine investing success have not changed whereas fashion ideas seem to radically change over time.
I believe the core principle is that by investing in companies, we aim to grow our money above inflation. This should be why we invest – to provide our future selves with the same if not more buying power than today. Rather than trying to identify next year’s future winners and concentrating our portfolio we should look to buy a very wide range of companies and keep diversification high and spread our risk – in effect rather than trying to find the needle we are buying the haystack. We can then overlay academic research to fine tune the portfolio to overweight those areas with higher expected returns.
If we are not comfortable with having all our money invested in companies due to the fluctuations in capital values this may result in, then we “water this down” by lending money to companies. This results in a lower expected return but with lower expected fluctuations in capital. As with the equity element above we should look to keep diversification high and costs low.
This blend of investing/lending (or owner/loaner as the Americans call it) forms the bedrock of investing success and evidence suggest that this element has a far higher impact on portfolio returns that the actual companies/funds chosen. It seems to me that many of the “fashion accessories” around investments are an attempt to make more interesting and exciting what is fundamentally a straightforward, simple and probably unexciting process- own a diversified portfolio of the great companies of the world and share in their growth.
In life many things that are simple are easy and those that are complex are hard. Investing is unusual in that it can be simple and hard. The fundamentals are not complex but sticking to them year in and year out can be very hard.
Success in investing, in my opinion, is about getting rich slowly over time and not trying to use the latest fashion or trends to shortcut the process. This might be very tempting and we have all heard of people who got rich quickly through some investment idea but my experience is these are generally the exception and not the norm.
Neil Rossiter APFS, Chartered MCSI, CFPCM
Chartered & Certified Financial PlannerCM, Chartered Wealth Manager