The Long-Term Rewards of Systematic Investing

This article was originally published on Quadrant Group’s website. Quadrant Group was acquired by Progeny in March 2017.

Modern life conditions us to be busy. We believe that being industrious and active is the best way to make money. But when it comes to investing, we forget that inactivity can be better for creating wealth. Warren Buffet put it eloquently when he pointed out that: “The stock market is a device for transferring money from the impatient to the patient.”

A big part of what a successful financial advice practice should offer investors is the counsel that in order to achieve their long-term investing goals they need to understand and embrace a more patient, disciplined approach. We take the emotion and short-termism out of investing, and help give investors the confidence their goals will be met without the need to constantly tinker with their portfolios after every market blip or wobble.

“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffet

Investing money well requires a logical and robust framework and an investment compass to plot the path ahead. Our systematic investment programme provides this and it includes our five investing principles and practices:

Five Investing Principles

  1. Have faith in capitalism and confidence in the markets: Whilst having come under recent criticism following the global economic downturn, as investors, we need to keep faith in capitalism as a robust and resilient economic system. We need to recognise that the markets are an efficient mechanism for rewarding those who provide capital to those engaged in the pursuit of wealth creation.
  2. Accept that risk and return go hand in hand: One of the inescapable truths of investing is that to achieve higher returns, you have to take on more risk. Many risks exist but appropriate risk should not be feared, because it is the source of returns that investors seek.
  3. Let the markets do the heavy lifting: Trying to beat the market – through either market timing or stock picking – is a tough game. We prefer to let the markets do the heavy lifting, which means: identifying market risks that should deliver decent returns; combining them sensibly in a portfolio; investing via low cost funds that capture the specific market rewards effectively; and ensuring the portfolio is rebalanced to retain its strategy over time.
  4. Be patient – think long-term: There is no short cut to investment success. Use the time on your side to capture the returns of the markets slowly, but effectively. It is time that allows small returns to compound into large differences in outcome for the patient investor.
  5. Be disciplined: Combine patience with discipline – stick to your plan and don’t be tempted to tinker or chop and change. Discipline is key in successful long-term investment planning. Don’t look at your portfolio too often or get distracted by short-term-noise.

Five Investing Practices

  1. Build a well-structured portfolio: Compiling a well-thought-out mix of different investments (referred to as asset classes) should sit at the heart of your investment programme. Successful investing is all about taking on well-understood risks that deliver a positive return and avoiding taking on risks that add little to the portfolio.
  2. Use diversification to manage an uncertain future: No-one knows what the future holds and owning a highly-diversified portfolio, spread widely across asset classes (bonds, equities and property, for example) and across global markets, industry sectors and by company, helps make sure that we are prepared for whatever the markets throw at us.
  3. Avoid cost leakage from your portfolio: Costs are insidious and eat away at market returns that you should be gathering for yourself. A systematic approach to investing like ours incurs far lower costs over time than the average actively-managed fund seeking to beat the market.
  4. Control your emotions using a systematic, disciplined approach: This keeps anxiety under control and removes irrational decision-making. Closing the gap between what reflective, patient and disciplined investors should earn from markets and what emotional, irrational and intuitive investors tend to earn is of enormous value.
  5. Manage risks carefully across time: Managing risks rather than performance means we avoid being blinded by returns. We do this by always rebalancing your portfolio back to its original agreed structure, reviewing the best-in-class fund choices and challenging and refining our approach where necessary.

A Portfolio for All Seasons

Investing money well requires a logical and robust framework and an investment compass to plot the path ahead.

When constructing a portfolio, the first thing we do is to carefully choose the asset classes that make the best contribution. We base our choices on the ability of each asset class to meet our pre-determined selection criteria. This framework allows us to review any asset class or investment strategy in a systematic way. We also divide the portfolio between growth and defensive assets. Growth assets are higher-risk, higher-returning, equity-like assets but we balance them with assets that perform a high-quality defensive role, predominantly high-quality bonds. Finding this balance is one of the most important decisions that we will make together. We will discuss your risk tolerance, the worst loss in portfolio value you can financially survive, as well as how much risk you need to take to achieve your goals to work this balance out.

Our systematic approach means we do things according to a disciplined system that is efficient, methodical and objective. It is also low cost and low in activity, and is sometimes referred to as passive investing rather than the ‘active’ portfolio management approach which is higher cost and higher activity. Low cost funds deliver better performance than a majority of higher-cost active funds. By selecting well-managed, low-cost, systematically managed funds, we will be providing you with the best chance of capturing the bulk of market returns on offer.

It’s an approach which is becoming ever more popular with investors. In a review of 2016 global asset flows by Morningstar, passive provider Vanguard garnered inflows of $289bn, more than the combined flows of 4,000 other global providers (which totalled $244bn). Furthermore, a recent report in the FT Financial Management section quoting Moody’s predicted that the ETF and index tracker funds will represent 50% of all assets in seven years. It was also noted that investors withdrew $340 billion in assets from active equity funds while passive funds saw inflows of $500 billion in 2016.

To sum up, at Quadrant we embrace the efficiencies of markets and their pricing and accept market returns, rather than trying to second-guess market movement. We use low-cost smart trackers to keep turnover to a minimum and rebalance the asset allocation on a regular basis, free of emotion. This simple concept helps us to sell high, and buy other assets cheap. Client savings represent years of hard work so it’s essential to remember that investors are likely to be best served by trusting the plan they have put in place and focusing on the issues they can control. Those who make changes to long term investment strategy based on short-term noise and predictions will invariably be disappointed.

By owning a well-diversified portfolio, having faith in the markets, being patient and remaining disciplined, we are confident that the Quadrant approach will provide you with every chance of successful investing.

If you would like some help bringing a systematic approach to structuring your investment portfolio, please get in touch.

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This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Dominic Lobo

Dominic Lobo

Associate Director, Wealth

Dominic became a founder and Director of the Quadrant Group in 1994.

Learn more about Dominic Lobo