Why your investment portfolio should include Index trackers!
In 2011 there were 88,525 regulated open ended investment funds worldwide … by the end of 2016 this number had grown to 110,271! (Statista 2017) So how can you be sure that your chosen investments will outperform the index they are measured against?
The answer is … you can’t. We’re all familiar with the words ‘past performance cannot be relied upon’, so to piggy back the best performing funds does not offer the perfect solution and may well prove to be a bad decision if the Fund Manager underperforms or leaves, or the sector you choose suffers a downturn (the oil sector is a good example).
It’s much better to consider:
- Asset allocation (the process of dividing a portfolio among major asset classes, such as bonds, stocks, or cash).
- Diversification (a risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimise the impact of any one security on overall portfolio performance).
- Sector (a particular group of funds that specialise in the same industry or market area).
- Liquidity (whether a fund deals monthly/weekly/daily and the levels of cash retained within the fund for redemption requests).
- Volatility (the amount a fund investment value moves up and down – volatility presents opportunities to buy assets cheaply and sell when overpriced).
Also consider how you feel about the level of risk:
- How much volatility do you feel comfortable with?
- What is your capacity for loss?
- Are you willing to adjust your expectations or do you prefer to increase/decrease the risk taken within your portfolio to match your expectations?
Let’s consider the two main types of risk when considering investments:
- Systematic risk … this cannot be reduced as it is impacted by events that unfold which are beyond our control … for instance, political and geographical events.
- Non-systematic risk … this part we do have the ability to reduce through the use of diversification.
Including index tracker funds isn’t the be all and end all of a well structured portfolio, but their inclusion can give your portfolio the best chance of real growth whilst reducing the additional risk taken when choosing a fund that employs a Fund Manager with the aim of outperforming the index. By incorporating index tracker funds into your portfolio you will be adding diversification and taking away the risk of a Fund Manager underperforming the index.
Let’s consider some of the returns over the last 10 years when comparing index tracker funds with funds managed by a Fund Manager:
Data: FE, 31 July 2017, returns in US dollars
On the chart, each red dot represents the 10-year cumulative return of one fund in the sector. The square represents the median of the returns, and the purple diamond marks the 10-year return of the index.
Clearly, there are actively managed funds that do outperform the index, we use many of them for our clients, but as you can see, index tracker funds can also add value. Index tracker funds can offer exposure to particular geographical areas, or sectors, for example … Global Health and Pharmaceuticals; whilst not relying on the views of individual Fund Managers by cherry picking funds within that sector.
The key is to maintain liquidity to ensure tactical moves can be made and ensure that your portfolio is reviewed regularly … you wouldn’t buy a car and not service it so why do that with your life savings or pension?
Always consider your investments as a whole and make sure your adviser is rebalancing your portfolio as appropriate in order to take advantage of the current economic climate. Low risk usually leads to lower long term returns, interest rates on savings accounts have been at an all-time low for some years and this trend is likely to continue to worsen. Of course, everyone should have some cash for emergencies and unexpected events, but for those with a longer term investment outlook (5 years or more) this should be supplemented with investments in other asset classes and geographical spread that offer better potential for real capital growth and/or income.
Speed Financial Solutions are a highly qualified financial services provider on the Costa del Sol looking after clients throughout Spain and the UK. We provide a discreet and comprehensive service to individuals, our service is tailored to your needs. We seek innovative solutions for our clients and employ our skills, based on many years of experience, to apply tax legislation to our clients’ advantage. Our relationship with clients is built on trust and mutual respect. We are accessible and approachable, and ready to answer your questions, giving you the confidence you want when dealing with a sensitive issue such as discussing your pensions, investments and savings.
Our Principal, Andrea Speed, is a Fellow of the Personal Finance Society (PFS) which is the professional body for the financial planning community. The PFS is part of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels.
Along with a Fellowship, Andrea is a CII Chartered Financial Planner specialising in Taxation and Trusts.
Please take a look at our website – www.speedfinancialsolutions.com for further information and contact us (Tel 951 315 271 or 951 318 529) – we are happy to discuss your own situation in more detail. One of our advisers would be pleased to spend some time with you either in your home or at our office to review your current savings, investments and pensions, so do call to make an appointment. Our Financial Review is completely free of charge and without obligation.
Andrea J Speed FPFS(DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
21 August 2017