Smarter Investing – Simpler Decisions for Better Results
Tim Hale’s Smarter Investing is a simple but highly informative introduction to the world of investing.
Investing is something that no one can afford to ignore. Our investment profile varies throughout our lives according to circumstances, but can tentatively be divided into two distinct phases – the accumulation phase (when we are economically active, working, building assets), and the distribution phase (retirement, living on the returns from our accumulated wealth)
Hale cuts through the considerable hype touted by managed funds and joins the rapidly growing number advocating index/tracker investment. Smarter Investing backs this advice with compelling evidence. While admitting a handful of managers might have the ability to consistently beat the markets, identifying them ahead of a few decades track record is impossible.
Smarter Investing is all about playing the probability game, giving yourself the best chance of getting required returns for an acceptable level of risk/volatility.
Although aiming at the novice to relatively inexperienced investor, Hale doesn’t patronize the reader through excessive dumbing down. There are numerous tables of data and graphs clearly presenting the information investors need to be aware of.
Hale presents a scathing chapter on charges, generally advising that the highest charges do not guarantee the highest returns, indeed the effect of compounding means that seemingly slight difference in charge rates can cause highly significant return differences over time. Therefore investors should shop around to find the best deal – invariably passive/index funds.
The book is written primarily for the U.K. investor, however the basic concepts of investment are covered thoroughly and clearly and are likely to offer something to worldwide investors of all degrees of sophistication.
Asset Allocation
Hale advocates an asset allocation (“building block”) approach rather than encouraging attempts at market timing / stock picking / choosing the right managed fund. Essentially, choosing the proportion of our funds to be held in various investment types is likely to be the most important investment decision we make.
Equities and bonds are considered level 1 (ie fundamental) building blocks. Equities are the main driver of real (ie after inflation) wealth growth. However, bonds smooth the volatility of equity returns. The mix between the two will depend on personal characteristics.
Level 2 building blocks include index-linked bonds, real estate, commodities and hedge funds and are used either to improve returns or further smooth the volatility of the level 1 mix.
Each of the level 1 and 2 building blocks is discussed in some detail.
Level 3 building blocks, are more specialized investments such as art, wine and vintage cars.
Particularly useful is the discussion on correlation. In seeking to diversify we should ensure that the various components of our portfolio are not closely correlated with one another. For example, real estate has an expected real return of 3%pa, but only a 0.3 correlation with equity, so real estate would be a good investment alongside stocks (our home may well fulfill this purpose).
