So, you think you can beat the stock market?
There’s always someone isn’t there? Someone you meet or see on the TV who reckons they can beat the stock market. There’s one guy in America for example called Jim Cramer. A former hedge fund manager he’s now more than a little renowned for his stock market advice and publishes what is best described as “Must Buy List” of stocks.
Or perhaps you’ve been offered an investment scheme or opportunity which offers exceptionally high rates of return? No risk, guaranteed returns, a once in a life time investment opportunity! A bit like the example of America’s Gabriel Britain who claimed to have achieved 16.2% annualised returns without any down years and persuaded investors they would be investing according to a complex mathematical trading model he’d developed, (well he was a former professor and associate dean of the Massachusetts Institute of Technology).
It makes investing a risky temptation
The investment industry is undoubtedly unique. It’s swamped with complex technical jargon. It’s fast paced, well paid, exciting, risky and ever so slightly mysterious. Investment celebrities leave the industry with their pockets well lined and a promise to share the secrets of their success. They speak of industry beating downside protection and perfect investment packages of low risk and guaranteed high returns. And it all makes it incredibly tempting to invest in these schemes.
But if it looks too good to be true, it usually is
Before you’re tempted to follow the advice of these self-proclaimed gurus or invest in those tempting schemes, take a moment to consider the facts. When a retired finance professor decided to test Jim Cramer’s claims, and at the time of his research, he found they didn’t deliver. Just 14 (or 28%) of Cramer’s 49 stocks had climbed higher than their trading price at the time of Cramer’s predictions. In fact the overall portfolio was down 7.09% despite Cramer’s dynamic and persuasive advice. And Gabriel Britain? He eventually pleaded guilty to conspiring to mislead investors.
Your investor’s checklist
If you find yourself confronted with a tempting investment opportunity or that list of “must buy” stocks, whatever you do, go through the following checklist before you proceed any further:
- A claim of guaranteed high returns with little or no risk is probably a fraud. Double check and take independent financial advice before you proceed. Let them know that you intend to do so.
- Do you understand the investment and how returns are generated? Do you understand all the terms including exactly what’s meant by the guarantee, the events the returns are dependent on and the likelihood of them materialising? Find out how long you need to stay invested and what your exit options are.
- Make sure the investment meets your objectives and that it aligns with your attitude to risk (as properly ascertained by a professional and not as perceived by you).
- Check the credentials of any scheme or individual with an independent financial adviser. Is the scheme authorised or regulated for example? And make it clear to them you’ll be checking with your financial adviser.
Cue ‘evidence investing’ – a better way
The reality is that all investments carry risk and the higher the expected returns, the riskier the investment. And you cannot predict returns. That means stock picking and trying to beat the markets will always be hit and miss and claims of significant gains, are in fact more likely to leave you out of pocket.
However, there is a growing body of empirical research described as ‘evidence investing’ which enables you to invest more intelligently. It aims to capture returns from the stock market by low cost, diversified and long term investments.
It takes into account your attitude to risk so that you can structure your portfolio accordingly. It embraces diversification to provide you with protection against risk and fluctuations and it considers inflation and cost, always trying to keep the latter to a minimum. It also steers you away from emotional based or risky investing and allows you to take advantage of research and insights acquired by academics over many decades.
The evidence investing approach has repeatedly demonstrated that in the long term, investors have higher expected returns when they invest in a globally diversified portfolio and it’s an approach we endorse wholeheartedly here at Juno Wealth Management. We just don’t think it’s good enough to risk your future and hard earned cash on an unrealistic promise or an unproven scheme or strategy. We’re certainly not going to risk investing on the basis of some self-proclaimed market expert’s top tips for buying certain stocks.