January 2022
We observe many investors with poor performance despite strong markets in the last few years. Here are some ideas to help you address this in 2022.
1. Acknowledge the reality of your performance to date
Are you measuring your performance? If so, are you doing it holistically – taking account of all the wins and losses across your entire portfolio? Then you’re in a position to assess how well you’re doing compared with how well you could be doing. Once you do this, you’ll often discover your performance is much worse than you thought (as many focus on and talk about the one or two good trades but overlook their losers).
Acknowledging the reality of this means accepting you’re not using the best investment approach out there and there are better investment options than you struggling to be your own portfolio manager – or relying on those who don’t deliver and untrustworthy people or institutions that often charge fees for delivering ordinary returns. It means recognising that genuine expertise is worth finding and paying for and that it can add much more value and manage risk better than you have been doing.
2. Get rid of your under-performing broker or adviser
Many people we have spoken to over the years are seemingly trapped in a relationship with a broker that has not delivered for years. Some of these brokers are snake oil salesmen, great talkers but hopeless investors with little or no alignment with their clients. Australia is loaded with them. The clients’ capital is often being used as a large source of non-aligned revenue generation for the broker and their firm; the capital is used to fund the latest corporate deal the firm needs to fund for hefty corporate fees – and always seems to deliver little to no return to the client (with a million excuses why not or promises that things are just about to improve). In effect the brokers’ main clients are their investment banking arms as they are the main source of revenue generation for the firm, and the client is just a sucker that is sold sweet nothings.
There is a big advantage to being invested in a fund where the fund is the only source of revenue for the firm. Firstly, the performance is clear, known, real and routinely calculated and produced by a third party, and secondly, the firm should only be remunerated by you the client and not have its main source of business being something that is using your money for some other benefit. Ideally there is a clear alignment with the firm’s principals invested in the fund themselves and paid mainly on performance, and not for asset gathering through having large amounts of assets or large base management fees. That way, you actually have a much better chance of performing and can easily track your performance.
Some advisers are competent but many are not, and many trap their clients into convenient but perennially under-performing investment approaches. Few are out there looking how to do a better job for their clients by having them invested with the best boutique investment managers globally. Some invest their wholesale clients in the same assets as their retail clients for their own ease of business, when they should be invested differently to take advantage of all the benefits that wholesale investors have.
3. Think outside the square
Many want you to think that the only thing you can do is buy stocks and property and hope for the best. This is far from the truth. There is a world of alternative investment approaches which are better aligned with absolute return investors (which is most of us) and will better manage the risk over a full investment cycle than a long only investor can possibly do. A simple example are investment managers which buy insurance to protect a portfolio against downside risks – reducing the chances of a disastrous portfolio outcome which sets you back for years. Are you using managers that do this? Or are you stuck in the traditional framework that’s only suited to a bull market environment and will likely suffer greatly when markets fall?
4. Acknowledge the investment cycle
It has been a Goldilocks period for investment markets and a prolonged bull market. Some completely naïve investors and investment approaches such as passive investing have done reasonably well from loading up on risk and not having seen that risk come to fruition (yet). But this is changing and the investment environment is becoming significantly more hostile and much less likely to reward long only buy, hold and hope strategies. Why? Central banks are now moving to a significantly less “accommodative” stance as they threaten to reign in inflationary pressures in response to the massive societal inequities and inflationary pressures created by their policies and money printing favouring the wealthy ahead of workers. Valuations of most assets are also very high and impute low forward returns with very high probabilities. Recognise that the last few years have in effect been highly abnormal and simply unsustainable (What can’t be sustained won’t be.).
This means single digit returns from here are much more likely than double digit returns (at best). And that risk management is now much more important to reduce the increased risk of large losses if valuations revert to longer term averages or inflationary pressures persist forcing a tightening in central bank policies. Hence, it makes more sense to move to investment approaches with good prospective returns, better inflation protection, and much better protection from large losses than simply being long only and loaded with equity and property risk. In fact, locking in high returns by reducing equity and property investments in favour of alternative strategies means that the abnormal gains of the last few years become permanent capital gains, protecting your wealth against the risk of large losses from market falls.
In summary
2022 is the year for radical change in the way you are investing. There is huge potential to improve your results and better protect your wealth for a changing investment environment including:
Step 1: Measure your performance across your entire portfolio in 2021 and be honest with yourself. If you are in a position where some of your investments have delivered little then avoid hope as a strategy or being frozen or convinced into doing nothing. Cutting your losers is a good strategy.
Step 2: Assess the value that has been added by your current broker or adviser relationships and stop using under-performers as these relationships are meant to add value to your bottom line, otherwise you are paying them for nothing or for treating you as a fool. Many of us are mistakenly loyal to long held relationships with sweet talkers that simply aren’t in our interests.
Step 3: Investigate alternative investment offers as there are many out there that are available to wholesale investors which better align with common investor objectives than traditional investment approaches.
Step 4: Consider the investment cycle and ask yourself is this an environment where you think you can realistically continue using the same approach to achieve your desired returns. If not then consider alternative approaches better suited to today’s investment prospects and risks.
There are many simple things you can do to protect your hard-earned capital and still make money, even in a more adverse investment environment. Acknowledging the realities above is a crucial step in getting there.
DISCLAIMER: WealthLander Pty Ltd ACN 646 957 119 is a corporate authorised representative (CAR; WealthLander) of Boutique Capital Pty Ltd (BCPL) ACN 621 697 621 AFSL 508011, CAR Number 1285158. CAR is the investment manager of the WealthLander Diversified Alternative Fund (Fund).
To the extent to which this document contains advice it is general advice only and has been prepared by the CAR for individuals identified as wholesale investors for the purposes of providing a financial product or financial service under Section 761G or Section 761GA of the Corporations Act 2001 (Cth).
The information herein is presented in summary form and is therefore subject to qualification and further explanation. The information in this document is not intended to be relied upon as advice to investors or potential investors. It has been prepared without considering personal investment objectives, financial circumstances or particular needs. Recipients of this document are advised to consult their own professional advisers about legal, tax, financial or other matters relevant to the suitability of this information.
The investment summarised in this document is subject to known and unknown risks, some of which are beyond the control of CAR and its directors, employees, advisers or agents. CAR does not guarantee any particular rate of return or the performance of the Fund, nor do CAR and its directors personally guarantee the repayment of capital or any particular tax treatment. Past performance is not indicative of future performance.
The materials herein represent a general summary of CAR’s current portfolio construction approach. Depending on market conditions and trends, CAR may pursue other objectives or strategies considered appropriate and in the best interest of portfolio performance.
There are risks involved in investing in the CAR’s strategy. All investments carry some level of risk, and there is typically a direct relationship between risk and return. We describe what steps we take to mitigate risk (where possible) in the Fund’s Information Memorandum, which must be read prior to investing. It is important to note that despite taking such steps, the CAR cannot mitigate risk completely.
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