Many of us are looking for the best strategy to improve the return on our savings. Many of us are disappointed by the unfulfilled promises of guided management offers or other management mandates, many of us are misled by our certainties, apprehensions and other behavioral biases that make us make mistakes in our investments in the equity markets; many of us invest… but few of us succeed.
In short, many of us believe in the potential of equity markets to improve the return on our savings, but don’t know how to do it.
I have been working on this subject for almost 20 years now. For 20 years, I have been listening to investors explain to me that they have never earned anything on their PEA or in the units of account of their life insurance contract, for 20 years I have been working to find the best strategy.
Today, is what we call experience, I have the impression that the secret lies in
1- Selection of a model portfolio whose characteristics are in line with the investor’s ability to accept the stress of the equity markets.
The investor selects a model portfolio whose characteristics are in line with his ability to withstand the stress of price variations, which is essential to expect a return higher than the risk-free rate.
The selection of the model portfolio is the most important step in lazy investing because the objective is not so much to seek the maximum return as to find the portfolio whose risk level (volatility, maximum variation of the portfolio) will allow him to invest serenely with an acceptable level of stress.
Typically, the model portfolio will look like :
x% in Euro funds ;
x% in global equities ;
x% in Eurozone equities
x% in emerging equities;
x% in government bonds;
x% in corporate bonds;
x% in gold ;
The X will vary according to the maximum stress level accepted by the investor;
Indeed, we must not reverse things. The return is not the main objective. The return is only the result of the level of risk accepted and supported by the investor.
A saver who would let himself be guided by the objective of return on his savings would take the risk of investing in a portfolio whose daily or semi-annual variations would be too important for him.
Investing in shares is a source of stress for the investor:
Sometimes, prices are excessively high: The investor is then happy and sometimes even euphoric;
Sometimes, prices are excessively low: The investor is then sad and sometimes even depressed by these latent losses.
Some will accept a latent loss of up to 30% or 40%, others will not be able to bear a loss level higher than 10%.
Each person has his or her own maximum stress level.
Those who are able to bear the stress of a strong variation of their portfolio will be able to assume a portfolio mostly invested in shares;
Those who are not able to assume a high level of stress will have to choose a portfolio with a minority of its assets invested in equities.
This question of the capacity to assume the stress of volatility is fundamental to understand before investing in shares as we explained in this article “Stock market: Are you able to assume the stress of volatility?
It is the capacity to accept the stress of volatility that will determine the return on your savings.
It is a mistake to start from the return and to undergo the risk, because the one who takes a risk higher than his capacity to assume it, will make bad decisions when the risk materializes: Under panic and fear of losing his capital, the saver will sell at the worst moment.
– The saver selects the mutual funds on which his lazy investment will be based.
Then comes the essential moment of selecting the UCIs in which to invest.
The real lazy person, close to the lazy person, will be able to facilitate his life by saving via ETFs. The ETF is then a simple and efficient solution to expose oneself to the risk defined in the model portfolio without taking the risk of selecting a portfolio manager who would not manage to outperform the benchmark.
Indeed, this year again, the latest SPIVA report concludes that few portfolio managers have consistently outperformed the benchmark.
3- Do it all in an investment with no fees or with the lowest possible fees.
Fees are at the heart of your savings performance strategy. If the lazy person’s strategy is to do nothing, why pay fees to pay a manager who has nothing to do?
That’s the whole point. The success of this strategy relies on low fees or at least a fee level that matches the level of service the investor needs.
Implementing a lazy investment strategy in a high fee investment will unfortunately never perform well for the saver and this is the main reason why you never earned anything on your life insurance units of account.
4 – Do nothing. Let time take its course.
Once this work of selecting a model portfolio and mutual funds has been done, the saver does not have to do much more than wait and let time take its course.
Only an opportunistic management of the payments can be considered. The investor can easily take advantage of market downturns to reinvest over the long term in the portfolio initially identified.