No Strategy Is A Bad Strategy
Active versus passive, flipping versus buy-and-hold, index funds versus direct investment? Debate rages, but JUNO economist Ed McKnight says it’s all about your tolerance for risk.
5 October 2021
Go to an investment event, whether it’s for property, shares or funds, and you’ll find battles raging all around the room.
Look at the faces of some immersed in the animated discussions and it’s clear that these keen investors have not just invested their money and wealth, but their emotions too.
Consider the battle between those who favour index funds compared to direct investment.
Who’ll beat the market?
In the left corner, you’ll find investors who favour index funds. They denounce any suggestion that a fund manager or investor could ever truly beat the market over the long term.
They favour stability, confidence, and predictability in their investment strategy.
In the right corner, there are those direct investors. These are the ones who’ll take a punt on individual companies or funds in hopes of achieving better returns.
At the end of 2020, those who bought shares in Tesla, Zoom, Peloton, and Amazon could rightly sit smugly after a bumper year.
The battle rages over which strategy is the best strategy, each side sticking to their own position.
These battles are not just relegated to shares.
At the start of this year, a successful property investor remarked how some in the property community had publicly criticised parts of her strategy on property investor forums.
A whole subculture exists on Facebook groups and social media pages, where well-meaning Kiwi property investors try to convince the new and uninitiated of the merits of their chosen strategy.
Perhaps it’s because investment is inherently unemotional that we need to inject emotion, competition, and all importantly, an enemy into the mix.
Yet, such battles of opinion are misplaced.
In investment, differences tend not to be caused by a disagreement over the facts, but by risk tolerance.
We can all agree that Fisher Funds Premium NZ Fund achieved the highest return, compared to other managed funds, over the last five years, according to Sorted, an investment education website.
At the same time, we can agree that over the long term, index funds tend to outperform managed funds.
But what you do with that fact depends on your read of them.
Conservative investors with a low tolerance for risk may think: “Just because Fisher Funds was at the top of the list over the last five years doesn’t mean they will be over the next five years.
“It’s too risky to take a punt on an individual firm – better to invest in a low-cost index.”
Investors with a higher tolerance for the unknown are more likely to think: “I don’t care that index funds do better over the long term. I’m not investing for the long term. I’m investing for five years. I’ll take the punt and invest in an active fund.”
In both instances, the diagnosis is the same. Still, the prescriptions are different.
All strategies work
In truth, money can be made, and wealth can be built using all investment strategies.
If well-meaning investors really want to help other Kiwis in their financial decision-making, they can have a greater impact by focusing their attention on people who are not already investing.
Convincing a saver to move from their default conservative KiwiSaver fund into a balanced or growth fund will have a greater impact than arguing with an existing investor about which growth fund is the best.
Similarly, helping an investor purchase their first investment property – whatever the location – will have more of an impact than arguing with an existing investor about whether they’ve invested in the right location.
It’s about getting started
The core to success in investment is less about what strategy you use, and more about whether you have started.
Once you’ve considered the facts, the answer to the question, “what’s the right strategy for me?”, is the one you can tolerate the returns from, whatever they may be.
It’s not the strategy but doing something with it that counts.
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