The cautious investor

Dominic Thomas
Feb 2024 • 2 min read

The cautious investor

Rising interest rates that offer ‘certainty’ often appear a good solution for investors in an uncertain world. The thing about uncertainty of course is that it’s always present. You can remain holding cash in deposit accounts for years, trying to avoid market falls in the belief you are being prudent; sensible with your money. The uncomfortable truth is that we won’t know if you were right until many years down the road.

What we can do is look back at history and observe how missing out on returns impacted the valuation of portfolios, even if it was simply for a week or a month, the impact of sitting this one out can have (and has had) a substantial impact on portfolios. Second truth bomb – I have no idea when this might happen again. I don’t have a crystal ball to be able to predict such things.

I came across this neat little video by Dimensional (an excellent Investment Management firm with the unusual evidence-based approach whilst clutching a bunch of Nobel prize winners for their work in finance and economics). The data considers January 1997 until the end of 2021.

The key for investors, as it is in many aspects of life, is one of patience.

Dimensional video

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The cautious investorJemima Thomas2024-02-23T09:27:47+00:00

Wishes, forecasts & worries

Here is another great piece I came across by David Booth, Founder of Dimensional Investors. David is one of the genuine sage’s of investing and I have great respect for him and his business. So I thought I’d share this piece which is timely.

When I was growing up, our local newspaper, the Kansas City Star, was full of news and had one page for opinion. After decades of cable news and nonstop digital postings, I see more opinions these days than news. That’s not a bad thing. But when it comes to investing, it’s crucial to remember the difference between news and opinion, and how they are sometimes used to forecast the future.

Any time the government releases new data on unemployment or inflation or interest rate changes, people start claiming they can forecast the future. That’s not necessarily a bad thing either. But most of what I hear people say isn’t what I would call “forecasting.”

Forecasting is when you have a high degree of confidence in an outcome based on well-proven models. The weather forecast for a few days from now is a lot better than anything I read in the Kansas City Star about investing. The weather forecast is pretty darn accurate. I’d sure call that kind of forecast the right use of the word. That’s different from someone issuing a “forecast” for when the Dow will hit a certain number. Or when inflation will reach a certain level. Or which five stocks will rise the most over the next year.

So when people say they forecast that something will be at this level at that time, I don’t call that a forecast.

That’s a wish.

And when people forecast that something will go down at a certain time?

That’s a worry.

DON’T BASE YOUR PLAN ON WISHFUL THINKING

Do you really want to invest your hard-earned savings—the money you’ll need for your kids’ college or your own retirement—based on someone’s hunch or wish?

The good news is you can have a good experience without having to do any forecasting—I believe you just need to be a long-term investor with a truly diversified portfolio.

Over the last 100 years or so, the average return of the market has been about 10% a year.1 I won’t call it a forecast, but my best guess is that over the next 100 years the average annual return will be about 10%. Of course, there may be large fluctuations, just like we have experienced for the last 100 years (and like we have experienced in the last six months).

Instead of forecasting, focus on the power of what I think has been behind the stock returns of the last 100 years: human ingenuity. Millions of people at thousands of companies working to improve their product, enhance their service, and lower their costs—and all adapting in real time to a changing world. We witnessed the power of human ingenuity over the course of the pandemic. I’m seeing it again as companies adjust to deal with inflation.

The world has changed in so many ways since I was a kid reading the Kansas City Star. I still occasionally read it on my phone now. (It makes me chuckle when I imagine trying to explain to my grandparents that I read the newspaper on the phone.) While I expect the world to keep changing—I’m not forecasting when or how—I am confident that human ingenuity will be a constant. Whether in good times or bad, that’s reason to be optimistic.

DAVID BOOTH

DIMENSIONAL Executive Chairman and Founder

Footnotes

1 In US dollars. S&P 500 Index annual returns 1926–2021. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment, therefore their performance does not reflect the expenses associated with the management of an actual portfolio.

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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Wishes, forecasts & worriesDominic2023-12-01T12:12:44+00:00

PATIENCE OF VALUE

TODAY’S BLOG

VALUE INVESTING

David Booth, the Executive Chairman and Founder of Dimensional wrote a piece that I would like to share with you. As you may know here at Solomons we believe in taking a long-term view of investments because they are designed to provide long-term sustainable wealth. Chasing returns appears easy as markets rise and fall, yet this as we have demonstrated time and time again is a fools errand and is not a robust, repeatable investment strategy, save a continual erosion of your wealth. Investing in equities (shares/stocks) provides the best chance of long-term inflation beating returns. A globally diversified portfolio with a bias towards smaller companies and undervalued ones (value) has plenty of evidence of outperformance over the long-term. However patience is required during periods where this does not appear to work (which if you think about it is part of the reason why it does). Anyway, here is David.

DAVID BOOTH

If studying financial markets for 50 years teaches you anything, it’s to keep things in perspective. During times of great uncertainty, like we’re experiencing now, investors may feel tempted to project today’s headlines forward or forget the useful lessons we’ve learned from the past.
I’ve been thinking about this a lot lately in the context of the growth vs. value stock debate.

Too often, news headlines distract us from taking the long view. They create a sense of urgency around what’s happening in the market right now. But we have nearly a century’s worth of data, and decades of financial science, to look to for guidance. That evidence reveals many investment lessons. For example, over long periods of time, stocks have generally outperformed bonds. This makes sense when you think about it. Stocks are riskier than bonds, so you expect to earn a premium return.

Most investors are probably familiar with this so-called equity premium, but they may be less familiar with the market’s size and value premiums. The same basic logic applies, and the same record backs them up. Historically, the stocks of smaller companies have outperformed those of larger companies. And relatively inexpensive stocks have outperformed more expensive stocks.

There’s solid theory behind thinking about investments in this way, but the premiums don’t necessarily show up every day. In fact, there can be long stretches when they don’t—stretches that can test the faith of investors.

I haven’t met many people who expect stocks to return less than US Treasury bills. And yet back when we started Dimensional Fund Advisors in the early 1980s, we found ourselves at the end of a 14-year period where T-bills actually outperformed the stock market. I remember a cover of Businessweek magazine proclaiming “The Death of Equities.” People then were saying the stock market would never be positive again. Of course, investors have since experienced one of the longest bull market runs in history.

We’re experiencing a similar historical variance right now with value stocks. Over the past decade, growth stocks have largely outperformed value stocks. But it’s important to keep things in perspective. According to Dimensional’s research, while value’s performance in the US from 2009–2019 was in line with its historical average (12.9% vs. 12.7%), growth significantly exceeded its historical average (16.3% vs. 9.7%). In other words, value has performed similarly to how it has behaved historically—it’s growth that’s been the outlier, performing better than expected. Financial science suggests you should enjoy these unexpectedly good returns, but don’t count on them repeating.

In my view, the rationale for investing in value stocks is as strong as ever: The less you pay for a stock, the higher your expected return. This is simple algebra. Still, some people are questioning whether the value premium has somehow disappeared. If value investing no longer worked, we’d have to throw out our economic textbooks and develop a new algebra.

I’m often asked what investors can do during times like these. The key to capturing any premium is to maintain consistent exposure to it. While we understand that the value premium may not show up every day, every year, or even every decade, sticking with value stocks can help you capture that premium over time.

No one can predict when premiums will show up, but we know they can show up quickly. In fact, some of the weakest periods for value stocks compared with growth stocks have been followed by some of the strongest. On March 31, 2000, growth stocks had outperformed value stocks in the US over the prior year, prior five years, prior 10 years, and prior 15 years, according to research conducted by our firm. As of March 31, 2001—one year and one market swing later—value stocks had regained the advantage in each of those time periods.

Why such a dramatic swing? It’s human behavior to stick with what’s working, and during periods when growth stocks are outperforming, many investors keep piling into those stocks. But many long-term investors think of it another way: The expected return on relatively cheap stocks is getting higher, which means more opportunity. As I like to say, value stocks are crouching lower now so they can spring up higher later.

Over half a century of observing markets, time and again I’ve seen that returns come in spurts. That’s why getting into and out of the market repeatedly is such a bad idea—you’re too likely to get caught on the wrong side of your decision. You can’t time returns. And you can’t predict them. To capture the historical premiums, you have to stay disciplined.

My long career in finance has taught me that there’s great value in keeping perspective, which includes keeping perspective on value. As my friend Robert Novy-Marx says, “I wake up every day expecting to see the value premium.” I, too, wake up every day expecting value stocks to deliver higher returns for investors. Time has only strengthened that conviction.

David Booth
Dimensional Fund Advisors

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GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

Email – info@solomonsifa.co.uk Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY | DATA PROTECTION

PATIENCE OF VALUEDominic2025-01-21T15:53:24+00:00

The Deep End

Solomons-financial-advisor-guest-blogger-Jim-Parker

The Deep End

Have you ever seen a child standing tentatively at the edge of a swimming pool? She’s torn between her desire to join the gang in the water and her fear of diving in. In committing to the market, investors can be like that.

You can always find a reason for not investing. “Perhaps I should wait till after interest rates rise?” goes one line of the thinking. “Or maybe I should delay till there’s more clarity on China? Or hold back until after earnings season?”

Emotions and assumptions usually underlay this indecision. The emotion can be anxiety about “making a mistake” or fear of committing at “the wrong time” and suffering regret. The assumption is that there is a perfect time to invest.

Obviously, the ideal solution would be to enter the market just as it bottoms and exit the market right at the top.

But the reality is that precisely timing your exit and entry is close to impossible. If it were easy, millions would be doing it and getting very rich in the process. Instead, the only ones who tend to consistently make money out of market timing are those who write books about it.

The financial media certainly love market timing stories. For one thing, there is always some event or variable they can peg it to—like a decision on interest rates or upcoming earnings or a chart indicator. For another, the idea of timing the market is a powerful one and tends to get readers’ attention.

For example, one high-profile US forecaster in early 2012 predicted a 50-70% equity market decline over the following two-to-three years. It was to be a replay of the 2008-09 crisis, he said, but with an even deeper recession.1

Timing the market… or time in the market?

That turned out to be a bad call. Global equity markets, as measured by the MSCI World Index, delivered a total positive return in Australian dollars of 93% from the end of 2011 to the end of 2014.² In USD, it was 53%.

Others advocate more elaborate timing strategies. For instance, one recent academic paper suggested the stock market delivers better returns relative to Treasury bills in the second, fourth and sixth week after each of the US Federal Reserve’s policy-setting meetings in a given year.³

The idea here is that the Fed leaks information about its interest rate intentions in such a predictable way that, even without the information, savvy investors can make money by just buying stocks in certain periods.

While these theories can be fascinating, it is arguable how many of us have either the time or inclination to try them out. And even if we did, this does not take account of the costs of all the required trades or the possibility that as soon as we implemented the idea it would be arbitraged away.

So ahead of a central bank meeting, some would-be investors fret about whether they should hold off until they see how the market reacts. Others already invested worry whether they should take their money out.

What really matters

The truth is that for long-term investors, these issues should be irrelevant. What matters is how their portfolios are structured and how they are tracking relative to their chosen goals. Markets will go up and down, security prices will change on news and it makes little sense to second guess them.

But while no one yet has come up with a consistently successful strategy for timing the market to perfection, there are some things that everyone can do to help ease the anxiety they feel about investing.

One is to realise that it does not have to be a choice between being 100% in the market and 100% outside. Ideally, an investor should stick to their strategic asset allocation—be it 70/30 or 60/40 or 50/50 equity/bonds.

Another is that this strategic allocation can be combined with periodic, disciplined rebalancing, in which the investor shifts assets from well performing asset classes to those less favoured. This is a good way of controlling risk without necessarily trying to time the market.

A third option is that there is nothing wrong with investors taking into account the returns they have already enjoyed and adjusting their asset allocations if they are on course to meet their goals. So, for example, for some investors it might make perfect sense to lock in returns after a good period and put the money into short-term fixed income if that meets their needs.

Yet another option is dollar-cost averaging. This is a method where an individual invests small amounts of an available pool of cash into the market over a period, rather than investing a lump sum in one go.

A useful contribution on this subject comes from Ken French, Professor of Finance at the Tuck School of Business at Dartmouth College. In his role as an academic, Professor French says the optimal decision is to invest it all at once. But while this might give an individual the best investment outcome, he says it might not be the best investment experience.⁴

This is because people tend to feel regret more strongly when it results from things they did do than from things they did not. So, for instance, it feels much more painful to buy stocks now and see the price go down than it is to neglect to buy stocks and the price goes up.

Professor French says that by dollar cost averaging, people can diversify their “acts of commission” (the stuff they did do) as opposed to their “acts of omission” (the stuff they didn’t do).

“The nice thing is that even if I put my finance professor hat back on, it’s really not that damaging to your long-term portfolio to just spread it out over three or four months,” he says. “So if you as an investor find that’s much more tolerable for you, you’re not really doing much harm.”

So, in summary, it’s always difficult to choose exactly the right time to get into or out of the market. For instance, it would have been nice to get out in late 2007 and back in around early March 2009.

But most mortals are unable to finesse it to that degree. The good news is that there are other options than just staying out of the market altogether and plunging back in.

These include maintaining a long-term strategic asset allocation in the first place, periodically rebalancing, taking money off the table if retirement goals are on track and dollar-cost averaging if that provides comfort.

The underlying philosophy in all these options is that individual investors are making decisions based on their own needs and risk appetites, not according to someone else’s opinion as to what the market does next.

Uncertainty will always be an integral part of investment (and life). But there are many things we can control. And this is where a good adviser comes in.

1. “Get Set for a Crash, Forecaster Says”, Globe and Mail, 10 January 2012

2. MSCI World Index (net div, AUD), Returns Program

3. “Want to Play the Market? Count the Fed Leak Weeks: Study”, Reuters 21 November, 2015

4. Fama/French Forum, “Dollar Cost Averaging”, 23 June, 2009

Jim Parker

Vice President, Dimensional

The Deep EndDominic2023-12-01T12:19:39+00:00

Investing: Greece is the word

Greece is the Word

The world’s markets and media financial pages have been consumed by a single issue in recent weeks—the stand-off between debt-laden Greece and its international lenders over the conditions of any further bailout. For investors everywhere, both of the large institutional kind and individual participants, the story has been fast-paced and difficult to keep up with. More importantly, the speculation about possible outcomes has been intense.

Of course, no-one knows the eventual outcome or whether there will even be a definitive conclusion. After all, this is a story that has been percolating now for six years, since Greece’s credit rating was downgraded by three leading agencies amid fears the government would default on its debt.

Since then, the Greek situation has faded in and out of public attention as rescue packages came and went and as widespread social and political unrest gripped a nation known as the birthplace of democracy.

But there are a few points to keep in mind. Despite the blanket media coverage of Greece, this is a tiny economy, ranking 51st in the world by GDP in purchasing power parity terms (which takes into account the relative cost of local goods).

On this measure, Greece is a smaller economy than Qatar, Peru or Kazakhstan, none of which currently feature prominently in world news pages. Its economy is about half the size of Ohio in the USA or New South Wales in Australia and about a tenth of the size of the UK. Even within Europe, it is tiny, representing only about 2% of the GDP of the 19-nation Euro Zone.

Size is everything

As a proportion of global share markets, Greece is also a minnow. As of early July 2015, it represented about 0.32% of the MSCI Emerging Markets index and just 0.03% of the MSCI All Country World Index.

And while its total debt is large in nominal terms and relative to its GDP at about 180%, this still represents only about a quarter of 1% of world debt markets.

Of course, what worries investors is not so much Greece itself but the wider ramifications of the debt crisis for its European bank lenders, for the future of the single European currency and for the global financial system.

Yet, many of these concerns are already reflected in market prices, such as in Greek government bonds, the spreads of peripheral Euro Zone bonds, regional equity markets and the single European currency itself.

While no-one knows what will happen next, we can look at measures of market volatility as a rough guide to collective expectations. A commonly cited measure is the Chicago Board Options Exchange’s volatility index, sometimes known as the ‘fear’ index. This has recently spiked to around 18 from 12 in mid-June. But keep in mind the index was up around 80 during the peak of the financial crisis in 2008.

Of course, the human misery and dislocation suffered by the Greek people through this crisis should not be downplayed, neither should the financial risks. But from an investment perspective, there is still little individual investors can do beyond the usual prescription.

Perpective

That prescription is to remain disciplined and broadly diversified across countries and asset classes and to be mindful that markets accommodate new information instantaneously. So the risk in changing one’s portfolio in response to fast-breaking news is that you end up acting on events that are already built into security prices.

In summary, the events in Greece are clearly worrisome, but Greece is a very small economy and a tiny proportion of the global markets. Events are moving quickly and prices are adjusting as news breaks and investor expectations adjust.

For the individual investor, the best approach remains diversifying across many countries and asset classes, remaining focused on your own goals and, most of all, listening to your chosen advisor, who understands your situation best.

Jim Parker

Vice President, Dimensional

Investing: Greece is the wordDominic2023-12-01T12:20:12+00:00

The Devil Wears Nada

Another guest blog from Jim Parker, vice president of Dimensional, with a particularly witty and pertinent take on the way the financial services industry attempts to mimic the fashion industry, but leads investors astray. Over to you Jim…

The global fashion industry is fickle by nature, pushing and then pulling trends to keep hapless consumers forever turning over their wardrobes. Much of the financial services industry works the same way. Fashion designers, manufacturers and media operate by telling consumers what’s in vogue this year, thus artificially creating demand where none previously existed. What turns up in the boutiques is hyped as hip by the glossy magazines. So you “have” to buy it.

Likewise, much of the media and financial services industries depend on fleeting trends and built-in obsolescence to keep investors buying new “stuff”. Driving this industry aren’t so much the real needs of individuals but manufactured wants with short shelf-lives.

Just as in fashion, consumers jump onto an investment trend just as it’s peaking and when the market has moved onto something else. So their portfolios are full of mismatched, costly and impractical creations such as hybrids, capital protected products and hedge funds. These products tend to be created because they can sell. So in early 2005, Reuters wrote of how banks were manufacturing exotic credit derivatives for investors looking for ways to boost yield at a time of narrowing premiums over risk free assets.¹

Four years later, in the midst of the crisis caused partly by those same derivatives, the shiny new things were “guaranteed” or “capital protected” products as financial institutions rolled out a new line of merchandise they thought they could sell to a ready market.²

Some investors made the mistake of swinging from one trend to the other, ending up with overly concentrated portfolios – like a fashion buyer with a wardrobe full of puffy blue shirts. Now while some of these investments may well have found a viable market, it’s worth asking whether the specific and long-term needs of individuals are best served by the design and mass marketing of products built around short-term trends.

Luckily, there is an alternative. Rather than investing according to what’s trendy at any one moment, some people might prefer an approach based on long-term evidence and built upon principles that have been tried and tested in many market environments. Instead of second guessing where the market might go next, this alternative approach involves working with the market, taking only those risks worth taking, holding a number of asset classes, keeping costs low and managing one’s own emotions.

Instead of chasing returns like an anxious fashion victim, this approach involves investors trusting the market to offer the compensation owed to them for taking “systematic” risk or those risks in the market that can’t be diversified away. Instead of juggling investment styles according to the fashion of the moment, this approach is based on dimensions of return in the market that have been shown by rigorous research and evidence as sensible, persistent and pervasive.

Instead of blowing the wardrobe budget on the portfolio equivalent of leg warmers, this approach spreads risk across and within many different asset classes, sectors and countries. That’s a tried and true technique called diversification.

And instead of paying top dollar for the popular brands at the expensive department stores, this approach focuses on securing good long-term investments at prices low relative to fundamental measures. Buying high just means your expected return is low.

Most of all, instead of focusing on off-the-rack investments created by the industry based on what it thinks it can sell this week, this approach delivers long-term, made-to-measure results based on each individual’s own needs, goals and life circumstances.

To paraphrase the legendary designer Coco Chanel, investment fashion changes but style never goes out of fashion.

1. ‘Demand for Exotic Derivatives Seen Growing – Bankers’, Reuters, Jan 18, 2005

2. ‘Investing: Storm Shelters’ – Money magazine, Oct 1, 2009

Thanks Jim, for those that don’t get the title reference, here’s the trailer for an amusing and allegedly accurate portrayal of life in the fashion industry.

The Devil Wears NadaDominic2023-12-01T12:39:00+00:00

The Vacationers’ Guide to Investing

Here is another good piece from Jim Parker over at Dimensional.

Two colleagues went on vacation separately. One had a great time. The other had a miserable experience. Their respective stories provide valuable lessons, not just about taking a holiday, but about investment.

Frances booked a beach house up the coast for a week. Brian opted for six nights of bush walking through the mountains. Frances returned to work, rested and recharged. Brian came back a jibbering wreck. What happened? Brian is a last-minute kind of guy. He’d heard about outdoor excursions from a stranger and decided on impulse to book a rugged ‘alpine adventure’. The problem was his urgency left him little room to negotiate over price or service. And the package he chose was not the one his acquaintance had recommended.

Brochures of Promise

The brochures promised sunlit vistas and invigorating nights in the open under canvas. But the weather wasn’t kind. It rained every day. Brian’s hired gear, which he’d organised at the last moment, was inadequate. His shoes fell apart, the tent leaked and he, quickly discovered, he hated bush walking.

It rained on Frances’ holiday, too. But she hadn’t invested all her expectations into lying on the beach. Anticipating all climates, she’d packed books to catch up on, along with a painting kit, crossword puzzles and a guide to local galleries and cafes. Having planned her vacation months in advance, Frances also had had a chance to think about her desired end experience. It wasn’t so much the beach she was looking forward to. It was the solitude, and quiet and chance to refocus. Frances had taken advice about the holiday from a friend who had known her for years, understood her tastes and values and knew her tolerances.

Brian, on the other hand, was so focused on someone else’s vision that he had no idea what he was trying to achieve. The advice he received was from a complete stranger and he had never really articulated to himself the goal of his trip. His impulse-buying meant he had spent too much on an experience that wasn’t right for him anyway and which left him no control or choice over his destiny.

Planning ahead

The point of this story is to show that investing is a little bit like planning a vacation. There are always going to be things outside your control, like the weather. But you can mitigate that by packing well and diversifying your activities. Not doing it all on impulse or at the last moment gives you more flexibility around cost and design. And thinking clearly about who you are and what you are trying to achieve lessens the chance of taking inappropriate risks.

Seeking counsel beforehand is best done through someone who knows you, understands what you value and appreciates what you are prepared to risk. Most of all, like most things in life, the journey and the destination shouldn’t really be separated. Where we are trying to go through investment and how we are trying to get there are often one and the same. Once we understand all that, holidays (and investment) can be much more successful and much less stressful.

Jim Parker: Vice President Dimensional

The Vacationers’ Guide to InvestingDominic2023-12-01T12:38:24+00:00

The Broccoli and Pizza Portfolio

I think its accurate to say that to date everything that has appeared in the blog has been written by me. It is probably well past the time someone else put something here. So, here is a piece by Jim Parker, the Vice President of Dimensional.

For some of us, it’s hard to give up on the idea that investment should be exciting. Picking stocks can be fun, after all, and there’s nothing like getting your timing right and bragging about it later with friends.

For all the accumulated wisdom about asset allocation and understanding risk, and about diversification and discipline, some people seem bound to see investment as an end in itself rather than as a means to an end.

For these folks, picking stocks is a hobby. They follow the gurus and soak up the financial media. Despite evidence to the contrary, they’re convinced they can build a consistently winning strategy from exploiting perceived mistakes in market prices.

Part of the reason for this is the natural human tendency toward over-confidence. For instance, we all like to think of ourselves as above-average drivers, when that’s simply not possible. Likewise in investment, many of us believe we have powers of foresight not evident in the wider population.

A Duke University study of corporate executives, published in 2010, found a dismal record of prediction from a group you might have thought would do well. Indeed, of 11,600 forecasts of the S&P 500 index over nine years, the survey found executives’ estimates of future returns and actual outcomes were negatively correlated. (This is a technical way of saying the executives were hopeless forecasters).¹

Research also suggests this tendency to trade a lot and make confident forecasts about stocks has a gender bias. Whether it’s a testosterone-driven instinct among men to big-note or something else, study after study shows the male of the species finds it harder to accept that they are unlikely to “beat” the market.²

For these red meat eaters, an investment approach that advocates working with the market, diversifying around risks related to an expected return, trading efficiently, exercising discipline and watching fees and taxes is going to sound like the financial equivalent of a broccoli and walnut salad – healthy but boring.

Surely the point of investment is to try hard and, Don Quixote-like, to charge at those market windmills? Are we not men?

There are a couple of ways of confronting this mindset. One is to hope for a change in human nature and convince each would-be master of the universe to separate his urge for ego gratification from his need to build wealth patiently and efficiently.

This is not impossible, of course. But one suspects it would take some time and would require an awful lot of face saving.

A second approach is to separate the investment nest-egg from the play money. If someone really wants to speculate on the market, they can be allowed to do that on the proviso that their long-term retirement money be invested the boring way.

This way the investor can buy some (expensive) entertainment and accumulate a few war stories to share at his next golf game without compromising the asset allocation painstakingly designed for him and his family.

It’s understandable that for some people investing is a kind of a hobby. After all, this is what keeps much of the financial services industry and media in business.

But in separating the concepts of speculation and investment, you can still enjoy the odd treat while ensuring a balanced diet overall.

Call it the broccoli and pizza portfolio.

Jim Parker: Vice President Dimensional

1. Ben-David, Graham and Harvey, ‘Managerial Miscalibration’, Duke University, July 2010

2. Barber and Odean, ‘Boys Will be Boys: Gender, Overconfidence and Common Stock Investment’, Berkeley, 2001

The Broccoli and Pizza PortfolioDominic2023-12-01T12:23:52+00:00