A client asks: I am sceptical of a V-shape recovery and favour quality firms (that have little debt and will survive – be they tech or other sectors) over indices. I think a number of firms making up the indices our portfolio largely consists of are going to desperately hit by or fail to survive the current situation.
Is it possible to hold stocks or ETFs independently within my account and would you have any recommendation of a small portfolio of holdings?
My response: Regarding investment opportunities I am sceptical of our ability to properly analyse any company’s accounts and arrive at a coherent investment decision that produces a markedly better outcome than just buying the global economy in total.
Out of the 8,500 companies you own part of some will struggle and others will thrive. That is the case in all economic conditions and regardless of the shape of the recovery.
Our approach means that those that do not do well will drop out of your portfolio and be replaced by those that are doing better but weren’t previously owned by you.
Those companies cover all the sectors and geographies where it is possible to invest money. As such they represent our inherent faith in capitalism allocating resources where they can best be used whilst taking them away from companies where they are abused.
In that way your portfolio is self-cleansing and we do not have to agonise over all the businesses you do and don’t own. We could agonise but I do not believe we can get enough decisions right to justify the extra time, effort and costs that it would require. And my honest opinion is that we have better more rewarding things to get on with anyway.
History suggests that most professional investors (i.e. active fund managers) with all the resources available to them cannot do it either. Active fund managers, on average, do worse than the indices that give us decent returns for very little effort.
In total we put our faith in the global economy continuing to grow wherever that growth might be.
That has been an excellent investment strategy over the years and decades and produced the inflation beating (and therefore wealth creating) returns needed to give your financial plan the best chance of success. Success is a plan that supports you for the rest of your life without worrying about running out of money.
Every now and then the permanent advance is suspended, and we endure tough times. The advance returns sooner or later, but we do not know when, which is why we make sure there is enough cash available to allow you to weather the storm.
Your financial plan is sound, will deliver what you need based on very modest future investment returns (just 0.5% pa above inflation) and therefore trying to get more doesn’t do anything for your long-term plan and, if anything, increases the overall level of risk you would be exposed to.
At least, that’s how I see it. Shall we have a zoom and discuss this further?
future proofing your finances
Town Close are expert financial planners. Our goal is the same as yours – to help you do the things that are important to you in the time you have remaining.