Weāre going to be hosting a series of Q&As here with some of our favourite thought leaders on investing and startups. Our aim here is to invite guests who will share a variety of different perspectives on investing. Not everything that they say will necessarily reflect Freetradeās views but hopefully it will be thought provoking!
To get started, Robin Powell aka āThe Evidence-Based Investorā will be answering questions from our community here next week
Post your questions for him to answer below but as always, please donāt ask for investment advice.
In case youāre not yet familiar with The Evidence-Based Investor yet, Robinās podcast & blog are a series of investment āmythbustersā, that help explain topics like active vs passive investing & counter some of the slightly more suspect advice that you might see in the media The episodes on indexing & ETFs are a couple of my favourites.
And if youāve only just heard about us Freetrade enables you to put your savings to work without paying fees, in simple to use mobile app. Start investing today.
What are the key ingredients for a DIY investor to out perform the market?
What is the appropriate mix between investing in passives like ETF vs DIY stock-picking?
Factor based investing is one of the new trends in asset management, have you seen successful ways that this has become accessible to the DIY investor in their stock picking?
What do you think of the late Jack Bogleās warning that index funds are becoming ātoo bigā and that the major index-fund managers will have too much voting control, which may not be in the best interests of the market/investors?
I would actually question why anyone needs to beat the market at all. The industry and the media place far too much emphasis on it. Itās actually very difficult to do over the long term, and only a tiny fraction of investors achieve it on a cost- and risk-adjusted basis, including the professionals. In my view, itās far better simply to capture the market return as cheaply and efficiently as possible.
Picking individual stocks is a bad idea. After costs, itās extremely hard to outperform the broader market. Itās also very time-consuming. I would always recommend investing instead in a low-cost index fund or passively managed ETF, and to enjoy both the risk and return benefits of broad diversification.
Factor-based investing has not had a particularly good run, but there is plenty of peer-reviewed academic evidence to show that tilting to factors such as size, value and profitability can be a good strategy over the very long term. It does come with a higher degree of volatility, though, so thereās a definite trade-off. But itās far, far better to use a low-cost factor funds than to pick stocks.
I donāt pick individual stocks and wouldnāt encourage people to try it. The markets aggregate the knowledge and expertise of millions of investors around the world. Everyone has access to the same information at the same time, and new information is reflected in prices within seconds. The chances that you, as an individual, know something the market doesnāt are very small.
We are a long, long way off any significant impact on market efficiency or price discovery from the growth of passive investing, especially outside the US. Indexing still has much further to grow. For me, this isnāt an issue that investors should be worried about in any case. Their primary responsibility is to themselves and their loved ones. Itās up to the industry, regulators and politicians to think about the bigger issues.
Iām not convinced by the argument that returns are going to be lower in the future, although I can see the logic behind it. But I think itās sensible to err on the low side when setting expectations. A 4.5% real return for a 60:40 stock-and-bond portfolio is about right.
I havenāt a clue about the future direction on Bitcoin. What I do know is that speculating on cryptocurrencies isnāt investing at all. You could easily lose a lot of money. I wouldnāt do it.
One of the biggest benefits of long-term, buy-and-hold indexing, with regular rebalancing, is that you donāt have to worry about ālosing investmentsā at all. You can guarantee owning all of the 4% or so of publicly listed winners that drive market returns. Buy a low-cost index fund, rebalance every year or so and forget all about it. Lifeās too short to be constantly checking stock prices.
A common argument against indexing is something like āwhyād you want to own loads of losers?ā, so I like this way of putting it. Itās very hard to predict those few winners so you might as well guarantee you do by owning it all. (I acknowledge that many in this community donāt particularly share that view, good luck to you all!)
so you are advocating the efficient market hypothesis.
However I donāt believe in the efficient market hypothesis fully due to a few examples:
Snapās first day trading share price volatility
Zoom technologies share price on the IPO day of Zoom VIDEO COMMUNCATIONS (different company) (It was obvious that many investors wrongly placed investments in what they thought was the IPO company but was actually a penny stock.
Other experiences during my time as an investor when market sentiment (such as October 2018) drives share price movements even though there was not a change in fundamentals - rather there was a change in investor perception of fundamentals.
I aim to pick stocks that are either undervalued (rather tough and I only ever do very small positions here), or have a competitive moat in a fast-growing industry (AI).
The episodes on indexing & ETFs are a couple of my favourites.
Freetrade enables you to put your savings to work without paying fees, in simple to use mobile app. Start investing today.
