Financial Happenings Blog
Tuesday, August 31 2010
The onset of the Rugby League & AFL finals series provides a nice reminder of some analogies between sport and the world of investing.
Most sport commentators and our own discussions focus on the star players and coaches. And with good reason, they play a huge part in the success or otherwise of a team. However ,it is also the one percent efforts of players that can turn a game or lead to the slightly better outcome. That extra effort to make the tackle or put off the opposition. In tight competitions these "one percenters" can make all the difference between winning and losing.
So to in the investment world. However in this world the start performers are the asset classes you hold in your portfolio (not the supposed star investment manager)s. Whether you invest in defensive or growth assets, cash or fixed interest, Australian shares or international shares, developed or emerging markets. The research suggests that this decision directs 95% of the final outcome. This is where the big differences are made.
However there are also the "one percenters" when investing. In particular, how much effort does the investor take in reducing the costs brought about by reaching the target asset allocation through taking care with trading can make a reasonable difference in the scheme of things.
This afternoon I have been to an information session put on by Dimensional Fund Advisors. Part of the session discussed the processes taken by Dimensional to minimise trading costs, these being both the explicit cost such as brokerage and taxes and also the implicit costs created through buy/sell spreads and market impact created through trading. (Market impact refers to the phenomenon that when trading large amounts you can tend to move the market against you - when you sell this drives prices down and when you buy it drives prices up.)
These implicit costs are difficult to measure and we need to be careful quoting any data as gospel but Dimensional provided data from an external monitor which suggests that their approach has provided a 0.65% better result compared to the median manager trading in Australian equities.
We need to sit back and remember that these trading costs make up a very small part of the overall end return for an investor, especially when your approach involves minimal amounts of trading such as our's. Asset class is still the main game but knowing that you team is going the extra yards to follow through with the "one percenters" provides further evidence that they are doing their very best to provide the best outcome.
If you want more information about A Clear Direction's approach to building investment portfolios with the help of leading fund managers like Dimensional please take a look at our Building Portfolios page or get in touch directly - firstname.lastname@example.org