Investor Points of Few – When You Don’t Know What You Don’t Know…

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By Alan Steel

Here’s one of my favourite questions for you:

“If you don’t know that you don’t know what you don’t know, how do you know what you don’t know?” 

And I’m sharing this with you because it seems very obvious (to me at least) that an increasing number of people only look at or listen to the financial headlines, and essentially forgo the content that goes with them.

As a consequence of that, they decide to either shun stock market investments completely in favour of “safe”alternatives, or fall for the widespread claims that an actively managed fund can’t beat a passive investment tracker. 

In fact, even the UK Regulator, the FCA is at it now according to this past weekend’s papers.

The FCA is apparently saying that no active funds can beat an equivalent index tracker. And that’s because they’re too dear, apparently.

It’s complete rubbish, of course, but nobody wants to hear that. 

Then they roll in the experts in order to confirm this obvious bias.

But folks would be better served instead by remembering the words of legendary economist JK Galbraith, who once said we should always remember that the media quotes the experts they want to quote.

And that sentiment goes hand-in-hand with the words of philosopher Von Goethe, who said: “It is well to be on the side of the minority, since it is always the more intelligent.” 

Now, index tracking as an investment style is undoubtedly cheap. No argument there. And sometimes it even works. But given it represents yesterday’s winners, and is skewed in favour of the biggest of those winners, why would anyone want to invest there?

Think about this for a moment: It’s been said that investing in index trackers is like driving along a road that you’ve never travelled before by looking only in the rear-view mirror.

Doesn’t make sense eh?

And that approach has proven to be a scary way to save, judging by the Dalbar Survey Reports tracking investor returns in the US since 1994 (looking back to 1984). The average private investor underperforms the S&P 500 index consistently from between 3% and 6% per annum.

So, if an active fund charge is say 1% per year more than a tracker, why the big underperformance?

It’s down to behaviour – buying too high, and then panicking and selling too low – because too many folks out there are in DIY mode. There’ s no adviser to counsel them and help reduce their risk.  

The Sunday Times Money page this weekend was filled with errors. Financial journalists are not subject to the same rules as IFAs. They aren’t held accountable for errors or bad advice.

Pity, that. 

By example, it was claimed that equities held inside ISAs and pension plans are totally tax free.

But that’s not true. It’s only been about 20 years since Gordon Brown taxed reinvested dividends at the basic rate.

And then the FCA was quoted as saying all that trackers beat active funds.

But that’s not true either. Go and check the long-term records of folks like Neil Woodford or Terry Smith, to name just a few.

By the way, that wasn’t the end of the errors by a long shot. More bad advice followed in the pension coverage.

Keep in mind that there are many IFAs out there who work hard and care about their clients. But as Brian Tracy once said: “There are never any traffic jams on the extra mile.”

Sadly, not many investors make it there, and likely won’t do as long as they keep skimming headlines without understanding what lies beneath.

And you can’t get that level of insight from a passive index tracker.

Speak with someone instead.

After all, it’s your money we’re talking about here.

Alan Steel, Chairman, Alan Steel Asset Management

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