Bursting the Investment Myth Bubbles

02.02.16

Alan Miller, Chief Investment Officer
SCM Direct.com

AM

As a fund manager with over 26 years’ experience, including launching the first UK equity long/short hedge fund in 1997, it is frustrating to see so many investment myths perpetuated by the industry.

Myth #1 - Active managers protect you in a downturn

The spiel is that active fund managers know when the market will crash and can protect investors by running to cash. However, whilst indexing guarantees all of the market's losses, active investors, in aggregate, will experience even greater losses when their much higher costs are factored in.

Myth #2 - Index funds always do worse than active funds as they are forced to buy 'bad' stocks

Since index funds invest in the whole market, they must by definition include good, bad and average quality stocks. Similarly, the sum of all the non-index funds holdings must also be exactly in line with the market and must include those same good, bad and average quality stocks.

Stocks regarded as high quality are normally highly valued and therefore prone to disappoint investors hoping for a high return. Data from 1997 - 2015 shows that so-called low quality stocks have considerably outperformed high quality stocks.

 

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Myth 3# - Costs don’t matter, it’s the return you get in your pocket

Irrespective of what the investment industry says, no-one can control what markets do but you can control the costs you pay. The arithmetic is simple - the less you pay for investments, the more of the return will end up in your pocket.

Also the argument that by paying active fees you are somehow getting smarter investing has been dismissed by numerous studies. Especially as many active managers are ‘churning’, which can incur as much as 50 – 85% additional costs to disclosed annual fees, all of which come out of investors’ pots.

Myth 4# - The 'outcome' of your investment is the most important consideration

Many fund groups say that it is the end result that matters, nothing else. My view is that it is not just where you arrived but how you got there. The ultimate consideration should be to balance Cost, Risk and Return.

Myth 5# - This year will be a stock picker's market

This statement comes down to whether markets or stocks will be correlated or not.

The fact is there are thousands of stocks in every single major market, so inevitably some will perform brilliantly and some disastrously. The fact is that no manager has a crystal ball and can predict which one it will be. Investment forecasting is as accurate as horoscopes.

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To blame one’s performance on it is “not a stock picker's market” is not even worthy of a rebuttal.

The value of investments can go down as well as up and investors may not recover the amount of their original investment.

SCM Direct is a trading name of SCM Private LLP which is authorised and regulated by the Financial Conduct Authority

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