What is the “best fit” investment strategy
by Charles Cheng, CFA
In previous articles, we’ve emphasized that one of the most important things asset holders can do with their capital is to maintain their exposure to financial markets over the long term. The way that it is achieved is less important, as investors can be successful with a wide variety of investment styles. Rather than looking for what is the “best” strategy, it’s often more important to find the “best fit”.
What does “best fit” mean? For us, it’s the strategy that makes sense given the one’s own circumstances and background in investing. A good fitting strategy is one that keeps the investor engaged, disciplined, and applicable to both good and bad environments, and therefore is sustainable over the long term.
For example, buy and hold stock picking is widely accepted as a sensible strategy and, depending on the investor, can produce outstanding returns. But consistently picking the stocks that outperform their index is not an easy task. Numerous research papers have shown that a small proportion of stocks contribute most of the return of an index. A study by Vanguard found that over a thirty-year period, 47% of stocks in a broad US index actually lost value, and 30% by more than half. 7% of stocks returned over 1000% each, pulling up the average return of stocks in the index to 387%, while the median return of stocks was only 7%. Clearly, the chances of underperforming the index while stock picking is very high.
Source: Vanguard, How to increase the odds of owning the few stocks that drive returns, Feb 2019
If an investor does not have the knowledge, patience, and spare time to dig deep into each individual company, they are not likely to succeed in stock picking. Going one step further, if they can only maintain the enthusiasm for doing the work during bull markets when they are making gains or are panicked into selling their positions when they are taking losses, then any success is also not sustainable.
The majority of personal investors are not going to have the time or expertise to implement a sustainable stock picking or systematic investment strategy without the help of a dedicated advisor. In these cases, passively investing*註 in the broad market with a predetermined plan makes more sense. The level of engagement required is far less without the requirement to outperform the market. More time can then be spent getting the important big picture items right, such as setting an appropriate level of risk taking and asset exposure, while minimizing transaction costs.
Mr. Cheng is a managing partner at a Hong Kong based independent private investment office. This article reflects his personal views and not his firm’s and should not be viewed as an investment recommendation.
*註: passively investing