Our Insights

About personal finance, investments and markets.
January 2, 2016

How are institutional investors going into 2016?

Analysts and investors are already looking into their crystal balls and are trying to ascertain what lies in store for financial markets in 2016. What are the most attractive stocks going into 2016? Is gold a buy now? While these questions are understandable, investors who base their investments on forecasts for the next year are doing it wrong. They typically chase performance, react emotionally to market mood, incur a lot of trading costs and thus underperform markets. Investors fare much better if they form a prudent asset allocation based on their long-term goals. It has been proven time and again, that asset allocation is the biggest driver of the risk-return profile of a portfolio. Most investors who come through our doors have an asset allocation that is far away from what is considered best practice among large institutional investors. Making changes here has a much bigger positive impact than trying to look into a crystal ball.

How not to do it

In the short term, financial markets are unpredictable. There seems to be an all-too-human need to believe that someone out there can protect you from bad things. There is an overwhelming amount of academic, peer-reviewed evidence that clearly demonstrates that nobody can reliably predict the future. Thus my recommendation is that the next time you hear some ‘guru’ making a forecast, no matter how intelligent it sounds, no matter how cogent the arguments made, tune it out.

Still don’t believe us that markets are on a random path in the short-term? Take a look at the following chart, which shows the performance of the major international equity markets since 2001. Looks pretty random? That’s because it is! We can infer probable long-term returns from valuation, but making a forecast for the next 12 months is more entertainment than anything else.

International Stock Market Returns jpg

Three steps to a successful investment strategy

Imitation is the sincerest form of flattery. Based on our experience from working with large institutional investors we unashamedly copy what has proven to work best for them. We can narrow down our approach to three simple steps, that will help you make better long-term decisions.

  1. Define your personal goals
  2. Choose an asset allocation that helps you reach your goals and maintain it through all market conditions
  3. Select broadly diversified, low-cost funds to represent asset classes in the allocation

In essence, create a plan and stick with it. If you don’t have a plan, how else will you know if you are making progress?

Can you tell me more about the right asset allocation?

There is not one single perfect asset allocation that works for everyone. Every investor is in a different personal and financial position and has different goals. Nevertheless, it is probably fair to say that if you deviate too much from what has become best-practice among large institutional investors, you are doing it wrong. We have included below the asset allocation of the largest wealth fund in the world, the Norwegian Pension Fund which currently manages around €800bn.

Norwegen Pensionsfonds - engl

Time for a new approach

Are your investments truly aligned with your own personal goals? Are you sure you have seen all available opportunities? Are you taking too much risk? Our analysis will show if you are on track.

If we can help you with your investment portfolio of financial plan in any way, please don’t hesitate to get in touch.

https://novelinvestor.com/international-stock-market-performance/

http://www.nbim.no/en/the-fund/

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