January 2017 – Known knowns

“There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don’t know. But there are also unknown unknowns. There are things we do not know we don’t know.” Donald Rumsfeld US Secretary of State for Defence February 2002

We live in uncertain times and we may not know what 2017 will bring however when it comes to investment one of the things that we know is that Capital Markets work. We may or may not like many of the things that are happening in the political world but investment markets are neutral and they will strive to obtain a market return regardless of politics or circumstances. In case you haven’t read our Investment Policy statement for a while I repeat the number one clause below:

‘Capital markets have consistently rewarded investors for the capital they supply. Companies compete for the supply of investment capital and millions of investors compete with each other on a daily basis for the most attractive returns. This competition drives prices towards fair value so that on any given day a point of equilibrium is reached between the buyers (optimists) and sellers (pessimists) on the price of a security. This price moves randomly and almost instantaneously to reflect new information such that it is difficult for any individual to systematically profit from market miss-pricings. We therefore accept market rates of return.

Many investment managers believe that they can actively exploit market mis-pricings by stock-picking or market-timing – the traditional activities of active fund management. If markets were not efficient then the brightest, hardest-working and most highly paid fund managers would be able to beat a simple buy-and-hold strategy over time. But nearly forty years of academic research has shown that traditional investment managers are unable to outperform markets by anything more that the amount we would expect by chance. Indeed, a multitude of studies has reached the same general conclusion: the average actively managed fund does no better than the market after fees, transaction costs and taxes.’

Our investment portfolios are designed to provide you with the market return and over time you can expect to receive a return on your capital. The amount of that return will depend on your risk profile which determines the amount of volatility that you are comfortable with. Risk and return are related so if you are a higher risk person you can expect a higher return over time. However a word of caution: it has been shown time and time again that investors who invest in portfolios which are too high for their risk profile usually get out when the markets go down and over time they receive much less return than the investor who chooses the correct investment profile at the start and sticks with it.

If you would like to discuss our investment policy in more detail please get in touch. You can download a copy from our website at: http://www.interfaceifa.co.uk/documents.php

Please get in touch if we can help.

About Alan Moran

Financial Life Planner
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