DIY Investing

Solomons-financial-advisor-wimbledon-bloggerDIY Investing

To my mind, one of the great ironies of financial planning is that a litigious culture, historic mis-selling, poor regulation, fearful professional indemnity insurers, better qualified advisers and RDR has meant that the cost of advising anyone has increased. Already this year our regulatory costs have increased by more than 10% (yet inflation is 0%). This will result in the continued rise of DIY investing (do-it-yourself).

I have tended to take the view that most people need to have a budget, a target, a savings habit and only when they have £50,000+ do decisions get complicated enough for me to get involved. Its not always the case, but largely. So it is alarming how poor most people are at investing – and by poor I mean really bad.

Just Unlucky?lucky sleven

An academic study from 2012 “Just Unlucky?” by Meyer, Stammsschulte, Kaesler, Loos and Hackethal at Goethe University in Frankfurt, into the success or otherwise of online investors (who generally think of themselves as well-informed) concluded that 89% of them lost an average of 7.5% a year. Let me repeat that 89% achieved -7.5% a year! Those that performed better were basically no better, exhibiting the same performance metric as luck. The research is based on German investors.. a nation that is historically characterised as shrewed, efficient, conservative and risk averse.

91% of DIY investors fail – big time.

Why? It would seem a significant element is holding the wrong asset classes and not well diversified globally. There is also a high degree of fear and greed at play, selling at the bottom and buying at the top. I can only imagine that some were following the tips from journalists and media commentators “best buys”. If dealing costs are factored in (and this was DIY investors using online dealing accounts, which presumably they thought were low cost) returns were 1% worse at -8.5% and achieved by 91% of investors.

Part of my job is helping people reduce their mistakes. We cannot be perfect, but we do apply sensible disciplines to remove a lot of errors. We call this advisers alpha – adding returns by good advice. Other research (of American investors) by Dalbar suggests that most investors underperform the market by 4-6% a year. But this latest research suggests it is far worse than that. Yet from next week, the new pension freedoms will mean that more people will take it upon themselves to go DIY with their pension. I don’t imagine that it will be a favourable outcome. This does not bode well for those using “discount” online investments, who eventually become so disenchanted with markets that they try less mainstream investments – which invariably blow up in their face and due to a peculiar twist, advisers such as myself pick up the bill… which to makes the cost of advice higher… and so the cycle repeats.

Dominic Thomas

DIY Investing2025-01-27T16:13:05+00:00

What is efficient markets hypothesis? are markets predictable?

Solomons-financial-advisor-wimbledon-top-banner

What is efficient markets hypothesis?

Here is another guest post from Jim Parker, it is rather lengthy for a blog post, but worth the read. Here he examines the criticism of the efficient markets hypothesis (or theory). EMH is the starting point for the approach that we take for clients with investments. Over to Jim.

The recent awarding of the Nobel Prize in economics to Professor Eugene Fama has sparked some criticism of his theory of efficient markets. Debate is a good thing, but it is always advisable to start with the right definitions.Jim Parker

Fama’s ‘efficient markets hypothesis’ is a model of how markets behave. It was developed back in the 1960s and essentially says that in an efficient market, prices of securities will reflect all publicly available information.

Prices are always changing, because new information is always coming into the market. When news does happen, prices quickly adjust to reflect it. So, for example, if there’s bad news on the economy, share prices tend to take a hit as investors collectively downgrade their expectations for future profits.

Critics of efficient markets theory are often guilty of arguing with a straw man. In other words, they misrepresent the other side’s argument to make it easier for them to attack it. On this score, saying markets are efficient does not mean they are perfect. It does not mean markets always move orderly in one direction. And it does not mean there are no anomalies in prices.

Essentially, the practical and common sense outcome of this much misunderstood theory is that it is extremely hard for anyone to consistently beat the market without taking on more risk. The price of a security represents the combined wisdom of thousands, if not millions of buyers and sellers, all working off the same information. Unless you have inside information, you will find it pretty tough to do better than the market.

Fama’s theory was hugely influential and lead to the growth of index funds, which passively track market benchmarks, thus saving investors paying big fees to fund managers who try to find mistakes in prices or make forecasts.

One of the common criticisms of the efficient markets hypothesis is that markets can’t be efficient because they can become highly volatile and irrational and can even crash at times of extreme uncertainty.

Think back to when Lehman Bros went bust in 2008. Investors at that time were worried that a complete collapse in the financial system was imminent, generating the threat of a second Great Depression. When things didn’t turn out as bad as people expected, risk appetites revived again. The US market has since climbed to record highs.

According to Fama himself, none of this is inconsistent with the idea of market efficiency.EMH

“The market can only know what is knowable,” Fama said after the GFC. “It can’t resolve uncertainties that are unresolvable. So when there is a large amount of economic uncertainty out there, there’s going to be a large amount of volatility in prices. And that’s what we’ve been through. As far as I’m concerned, that’s exactly what you’d expect an efficient market to look like.”1

The implication of all this is that unless investors have a crystal ball or inside information, it’s very, very hard for them to do better than a competitive market. When they do, it’s usually more down to luck than their own skill.

In recent years, a challenge to the efficient markets idea has come from behavioural finance theory. This says markets make mistakes because people are irrational. So greed takes over during the good times and bubbles develop. Conversely, fear takes hold in the bad and markets are oversold.

Sharing the Nobel Prize with Fama this year was Professor Robert Shiller, who comes from this school. Essentially, Shiller’s view is that there are predictable patterns in stock prices and these are rooted in human behaviour.2

Some Australian critics of Fama’s theory have cited Shiller’s research showing the volatility of share markets is far greater than can be justified by the rational expectations of future dividends.

The response to this is quite simple. Fama has never said that markets are perfect. He has never said that there are not anomalies with his model. Insider trading is one. The ‘momentum effect’ – where stocks that have performed significantly better or worse than the market over a period of time tend to persist in that direction – is another. A third is the pattern of stock returns around earnings announcements.

But Fama points out that it is still very difficult to make money out of these apparent anomalies, because the costs arising from the amount of trading you would need to do to exploit these effects would wipe out any gains.

“You have to realise that market efficiency is a model,” Fama says. “If it were the truth, we would call it the truth. But it’s a model, which means it’s a simplification of the world. It does a good job of almost everything, but there are some things it doesn’t do a good job on. But they are few and far between. And for practical investment purposes, markets are efficient for pretty much everybody.”

Put another way, if you believe the critics of efficient markets that it is possible to consistently, year-after-year, profit from prediction-based models, where are these people? Survey after survey shows most fund managers underperform the market by the margin of their fees and the ones that do outperform don’t tend to repeat this feat.3

In practical terms, even critics of the EMH like Shiller have said it is tough for any individual to beat the market without taking on more risk than what is offered. Another behaviouralist, Professor Richard Thaler, has said in some ways the financial crisis strengthened Fama’s theory.

“Lunches are still not free,” Thaler wrote in The Financial Times. “Shorting internet stocks or Las Vegas real estate two years before the peak was a good recipe for bankruptcy, and no one has yet found a way to predict the end of a bubble.”4

But what about Shiller’s idea that there are patterns in prices that predict long-term returns? Actually, Fama doesn’t disagree. In fact, his own research with Ken French has been hugely influential in demonstrating that.

Fama and French demonstrated a long-term premium from small company stocks over large and from low relative price stocks over high. More recently, they and others have established a relationship with expected profitability and returns that is persistent and pervasive.

The debate really is over firstly whether these premiums are rational and secondly whether they can be timed.

“If I were to characterise what differentiates me from Shiller or Thaler, it’s basically we agree on the facts — there is variation in expected returns, which leads to some predictability in returns,” Fama told The New York Times recently.

“Where we disagree is whether it’s rational or irrational. And there’s nothing in the available evidence that allows one to really settle that in a convincing way. The stuff that both Shiller and I have done has been very illuminating in terms of the behaviour of returns. The interpretation of that is open for reasonable disagreement.”

Neither is there any convincing evidence that you can successfully and consistently time these patterns in returns. Dimensional’s own extensive research has tested a number of timing models and found no evidence of abnormal returns.5

The efficient markets hypothesis is not perfect. Even the man who fathered the idea admits that. And while its biggest opponents go much further than that, they still say it’s pretty hard to beat the market without taking on more risk than the market offers. And they all agree it is very, very hard to time these premiums with any consistency.

Uncertainty will always be present. The market can’t account for that. It can only know what is knowable. When there is a lot of uncertainty around, markets will be more volatile. And this is why we diversify.

So the takeaway for most non-academic people from this fascinating debate is that it is still best to work on the assumption that prices are a fair reflection of the information that’s out there at any point in time.

Their next decision is how much risk they want to assume and to ensure they diversify away avoidable risks – like holding too few securities, betting on countries or industries and following market forecasts.

It’s the same old story – but the right one for most of us.

Jim Parker: Vice President. Dimensional.


1. ‘Fama on Market Efficiency in a Volatile Market’, Fama/French Forum, Aug 11, 2009

2. ‘Robert Shiller: A Skeptic and a Nobel Winner’, New York Times, Oct 19, 2013

3. Standard & Poor’s Indices Versus Active Funds Scorecard, year-end 2012

4. ‘The Price is Not Always Right and Markets Can be Wrong’, Richard Thaler, Financial Times, Aug 5, 2009

5. ‘The Predictability of Higher Expected Returns’, Gerard O’Reilly, Dimensional, Nov 2013

What is efficient markets hypothesis? are markets predictable?2023-12-01T12:38:39+00:00

Deja Vu Investing and the Sequel of Ker-ching

2003: The Curse of The Black Pearl
As you will have gathered, I’m a financial planner that likes films, probably partly because I enjoy a good story – something that I get to hear from clients (the story of their life to date…in part! but perhaps more interesting is where they plan to take the story in the years to come). Anyway, I was bombarded by more emails about “new investment funds” which frankly all seem to be very much alike, which prompted me to reflect on the sense of “deja vu” that I sometimes also experience with film.
There are probably a wide range of reasons why there are so many sequels in the film world. The worlds highest grossing 50 films contain 40 films that are part of a series – Pirates of the Caribbean, Lord of the Rings, Harry Potter, Indiana Jones, Star Wars, Shrek, Spider-Man, Jurasic Park and believe it or not Transformers to name a few. A cursory glance at a theme park list of rides and you will see this theme further “monetised”. There is very much as sense of finding a “cash cow” and milking it for all you can – or the goose that continues to lay golden eggs. This might be said of the investment world too, where new fund launches become a “me too” bandwagon form of investing. The film world is much like momentum investing – a popular film begins to gather momentum, becoming a global success. Investment Companies also spend considerable sums on marketing to tell us all how fantastic they are in the hope of gaining further momentum. Unlike film though, the ticket price will not be pretty much the same for everyone, those in at the beginning will benefit far more than those towards the end – which has no direct comparison to film, which is essentially a fixed but unique (because of the viewer) experience. Investing once the news is out, is a bit like arriving late at the party, it has happened (largely) the greatest profits have been made and the original investors have probably sold out for a higher profit to an investor that wanted to catch some of the action, all too late. This is the often forgotten key principle for professional investors, like those appearing on Dragons Den.
When it comes to investing, the greatest returns are invariably achieved by the first few investors, this is a high risk strategy that most of us are unlikely and unwilling to risk – after all it could go horribly wrong for a new investment (there is a higher chance). So most tend to wait until the good news is confirmed, by which point the opportunity will have largely passed. This constant chasing of returns and becoming disillusioned tends to cost investors considerable sums, often eroding their asset values. This is one of the reasons why I discourage clients from playing the game – which is unwinnable for most people. There is an alternative though, one that will reduce costs and provide better results. Unlike the films that entertain millions (and make millions – for example, the Pirates of the Caribbean series has taken over $3.7bn in worldwide box office tickets) investing should not be about being taken along for the ride.
We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting
Deja Vu Investing and the Sequel of Ker-ching2025-01-27T16:19:47+00:00

Rangers – What Lurks Beneath

1954: 20,000 Leagues Under The Sea
Financial planners often use the football league as metaphor for investment performance – the six top teams are fairly predictable each year and a sense that success breeds success. Relating this to the top performing funds is stretching things, though I acknowledge that sometimes this does appear to be the case. Invariably funds do not consistently perform at the highest level, with very few exceptions. There are some analogies that can be helpful, though not necessarily reliable – for example the duration of the manager, which for Fund Managers can be relatively short-term, but perhaps not quite as brief and sanguine as the very short-term tenures of the majority of football managers. The size of the football club would often suggest strength of resources (as it might for investment companies) but recent evidence would suggest (as any good business person knows) that governance and how an organisation is operated are the vital ingredients.
Take Glasgow Rangers typically either 1st or 2nd in the comparatively small pond of the Scottish Premier League. It would appear that this club (company) had forgotten (like many others seem to) how to run a business. Expenses cannot exceed income for very long. Ambition and desire can play havoc with reality. The use of tax avoiding schemes to pay staff were always questionable and certainly complex. The most recent takeover of Rangers by Mr Whyte used funds provided in advance of ticket revenues… which has a similar feel to it as using the future payments on mortgages to form a capital sum (which effectively was the mechanism that caused the credit crisis). What has this to do with investors? well nothing, unless you have invested in a particular Enterprise Investment Scheme (which is a higher risk form of investment) and run by Octopus, who amongst various holdings, have holdings in Ticketus. The money provided was essentially “working capital” that enabled Mr Whyte (having put up personal guarantees) to takeover Glasgow Rangers. Effectively swapping future ticket revenue for a lump of cash now. This is also similar to the demsie of Enron who operated on the unchallenged assumptions about the future. The implications of the arrangement and the collapse of Glasgow Rangers are being explored by both the administrators and Octopus. EIS investors know that an EIS investment is high risk and there is always a chance that they could loose all of their money, a pertinent question though, is what is the difference between business risk and carelessness? The two are obviously quite distinct.
So as fans of Rangers come to terms with the harsh reality that football is a business (however hard many try to present this reality as “inaccurate”) some investors may need to come to terms with “looking under the bonnet”. Investments can be incredibly complex, with all sorts of attractive promises, they should be designed to make money, but remember that the investor is only one party that seeks to do this, so too does the Product Provider and the businesses that are held within the portfolio. Certainly everyone makes mistakes, but the stockmarket is no place to learn life lessons, unless you really do have money to burnFinancial planning when done well involves considering investments carefully, looking under the bonnet and exposing the possibility of nasty surprises and coming to terms with the reality that there is risk in everything, but minimising these to a sensible level. Importantly reviewing and challenging assumptions in the light of real experience is also a vital part of the “work in progress” that a financial plan will include.
We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting
Rangers – What Lurks Beneath2025-01-21T15:54:49+00:00

FUNDS: Blackrock – UK Fund Repeating Performance Is Not Easy

1947: Repeat Performance – Werker
Financial Planners are often caught up attempting to select the best Fund Managers and funds, anyone that knows much about me will appreciate that this is a game that I’m reluctant to play, information about my approach can be found within the resources section of the main website. In essence as a financial planner I believe that my primary task is to help clients achieve their goals, not to beat the market. Those that simply attempt to beat the market are bound to deliver disappointing results as no one has consistently been able to do this over the long term (at least no one I know of).
Today a very well known and highly respected Fund Manager from a good Fund Management Group (Blackrock) announced that he would be stepping down from his role as lead manager on the Blackrock UK Fund. Mark Lyttleton has run the fund since September 2001 and will hand over to Nick Little. Mark will continue to run the rather more successful Absolute Alpha Fund and the Dynamic Fund. His performance with the UK Fund has not been anything like as spectacular (well we can’t all be good at everthing) but when it comes to investment returns, this means that by most measures the UK Fund underperformed its peers and indeed its benchmark of the FTSE AllShare, though admittedly this does depend on which set of data is considered. This move does tend to add some weight to my assertion that consistently outperforming the market is very difficult indeed, something that this AA rated Fund Manager has not achieved with this fund, and remember Mark Lyttleton is one of the better Fund Managers.
We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting
FUNDS: Blackrock – UK Fund Repeating Performance Is Not Easy2025-01-27T16:22:36+00:00

Asset Allocation Review

We have posted the revised asset allocation models to clients today, these should be with you by the weekend. The printed pack will include an instruction letter for you to sign and return in the first class Freepost envelope so that we can implement the changes to your portfolio. We cannot (and will not) make alterations to your portfolio without your permission as we are not discretionary fund managers (meaning we do not act under our own impulses to move things around and then tell you what we’ve done after the event).
Please let me know if you do not receive this and expected to do so.
We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting
Asset Allocation Review2023-12-01T12:49:00+00:00

Asset Allocation Review

I have reviewed all client portfolios and am urging caution in the current market conditions. I have amended asset allocations to reflect this and documentation will be issued directly to clients shortly. If you are eager to implement changes, please request the pdf version from me. You will recieve full instructions in due course.
We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting
Asset Allocation Review2023-12-01T12:49:02+00:00

Investment Update

I have updated the data within the guide “Our Approach to Investing“. This now includes the 2010 data which was recently compiled and released by Towers Watson. An interesting note, for the long-term investor, there has not been a single 20 year period where the rolling average returns from equities have been negative in the last 25 sets of 20 years. You’ll need to see the document to get this.
We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting
Investment Update2023-12-01T12:49:02+00:00
Go to Top