Busy investing is not smart investing

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Canny view by Nick Stewart, CEO & Authorised Financial Adviser

Published in Hawke's Bay Today

Do you want to know a secret?

A big part of the financial services industry has a vested interest in convincing you that the key to a successful investment experience is staying busy.

Thumb through an investment magazine and you find any number of ads for trading software, courses in options trading, chart packs and newsletters that promise individual alerts on hundreds of companies.

Now some people seem to actually enjoy poring over price trends and fundamental analysis or watching moving averages on stock charts. But most of the population simply have better things to do with their time.

Where you stand in the debate about staying "busy" by thinking like a trader often depends on whether you see investment as the means to an end or as an end in itself!

Although the vast majority of investors would take the former view, the message delivered by part of the financial services industry through the media is that the key to wealth management is worrying about all that stuff.

The upshot is that most people start believing that they need this paraphernalia to invest well. And some do have a few successes. But inevitably they end up underperforming the market through bad stock calls, chasing last year's Big Thing, running up big costs or failing to diversify.

Funnily enough, investment is one area of life where constant hard work and minute research day to day don't actually pay dividends.

In contrast, the people who succeed don't trade much. Instead, they concentrate on getting their asset allocation right, staying diversified, riding the ups and downs and keeping an eye on costs and taxes.

Interestingly, those are all things that you can control. "Busy" investors, by contrast, spend lots of time and money on research that can be rendered redundant by unforeseen economic, corporate or political events.

Even the busiest investors – with all the latest software and charting tools and fundamental alert – can still get blindsided by the unexpected. That is the nature of markets. They are unpredictable.

Even in times of apparent plain sailing, hyperactive investors can do themselves a disservice. All that tactical trading is expensive – in initial outlay, and in the higher turnover the activity generates.

Of course, this lesson applies not only to individual investors but to professional fund managers.

The difference is that busy managers can pass back the costs to their research and constant trading to end investors.

The wonder is that people don't seem to draw a link between the higher fees that busy managers charge, and the actual returns they deliver, an irony noted by Anthony Gallea, author of Contrarian Investing.

"Investing is a strange business," he wrote. "It's the only one we know of where the more expensive the products get; the more customers want to buy them."

Of all the determinants of any fund's performance, expenses are among the most important. And remember, they are deducted directly from whatever returns the manager generates. Plus, their effects compound over time.

So, it seems that successful investors are not necessarily busy investors – just smart ones with lots of time!

• Nick Stewart is the CEO and Authorised Financial Adviser at Stewart Financial Group, a Hawke's Bay-owned and operated independent financial planning and advisory firm based in Hastings.

• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961.