If you enjoy horse racing and the occasional bet, you might have tuned into this year’s Royal Ascot.
Avid racing fans will likely have an array of stats and data at their disposal. But placing bets, even with the benefit of reliable information, can be an active endeavour with a high degree of risk.
Yet, there is an element of horse racing that takes on a more passive, long-term approach – owning horses.
Horse owners will likely have done their research into a horse’s lineage, acquired the animal, then passed it onto a trainer and jockey they trust to raise and ride. It has a lot in common with a passive, evidence-based investing approach, like the one we champion at Grey Parrot.
But what does passive investing entail? Read on to discover the benefits of adopting this data-driven, “buy-and-hold” investment strategy, rather than chasing short-term gains – and why being more horse owner than professional gambler could benefit your financial plans.
Passive, evidence-based investing relies on data to reduce unnecessary risk
Passive, evidence-based investing, or a “buy-and-hold” approach, looks at developing a carefully tailored portfolio of investments and holding onto them – riding out any short-term dips in the marketplace in pursuit of long-term gains.
At Grey Parrot, our investment strategy relies on passive investing, rather than active investing. This involves regularly buying and selling to try and outperform the market and is built around:
- Backing up investing decisions with cold, hard data
- Reducing risk by not chasing quick gains
- Putting our clients’ needs first, and potential solutions second.
It will likely involve developing a well-diversified portfolio across various markets and assets. We’ll assemble this using supporting evidence and a thorough review of historical trends.
This could help your portfolio overcome any short-term challenges by giving it the potential to offset any losses with gains elsewhere.
All these steps will help us ensure that any risk is aligned with your personal tolerance.
Passive, evidence-based investing might reduce your associated investment costs
Active investing can be a more costly approach, as transaction fees on regular trades can soon add up.
A passive, or buy-and-hold, approach looks to carefully select solid investments – backed by data and historic evidence – and retain them over a long period.
This largely cuts out transaction fees from making regular trades and frees up that cash to be put to better use elsewhere.
A passive approach doesn’t mean adjustments can’t be made over time or new assets acquired if an opportunity presents itself. If anything, it means you can patiently and carefully review any new investments before deciding if they suit your needs and opting to invest.
Passive, evidence-based investing could reduce worry during short-term market dips
Human beings are emotionally driven creatures. There is a diverse range of common psychological biases that can influence those emotions and potentially prompt you to make decisions that aren’t in your best interests.
One such bias is known as “loss aversion” and refers to the theory that people experience the pain of losses twice as much as the joy of gains. In times of economic uncertainty, such as if a sharp market dip occurs, this bias might prompt you to sell off your investments.
This could be a mistake, as while history is no guarantee, markets typically rebound over time. If you’ve opted to part with your investments, you won’t benefit if they bounce back and continue to increase in value over the long run.
Schroders reports that, if you invested in the FTSE 100 in December 1999 and maintained your investment for the 20-year period to December 2019 – while reinvesting your dividends – you’d likely have seen average returns of 122%.
Learning to accept the benefits of a long-term approach and leaving your investments to produce passive returns, could help you overcome the worries associated with biases like “loss aversion”. It could also free up more of your time to spend focusing on your loved ones or hobbies.
Read more: Market volatility – 3 simple reasons why it doesn’t actually mean greater risk for your portfolio
Passive, evidence-based investing could produce better outcomes than active investing
This is a vital lesson to remember: very few active fund managers beat the market in the long run.
MoneyWeek reports that over the 10-year period to June 2022, only 1 in 4 active funds outperformed their passive counterparts. Meanwhile, IFA Magazine reported in December 2022 only 27% of active funds managed to beat their passive alternatives across the year.
One of the most surprising revelations came from the Motley Fool who reported on Fidelity’s own analysis of their clients’ portfolios between 2003 and 2013. The findings determined that the best-performing portfolios were owned by individuals who hadn’t touched their investments.
The most shocking fact is that many of these successful investors were actually already dead.
Now, we’re not championing death as a sound investment strategy. However, the findings do show how a passive approach to investing might deliver the best returns.
Passive, evidence-based investing encourages you to take a step back and focus on the things that matter
Passive investing pushes you to be more patient and encourages you to focus on letting your investments grow over time – until they reach what is needed to attain your goals.
At that point, we’ll likely turn around to you and perhaps surprisingly say: “Stop investing! You have enough. Go spend and enjoy your life”.
That’s the ethos at Grey Parrot. We want to guide you on that journey – and encourage you to focus on the things that truly matter – so that you can benefit not only financially, but also in your own personal wellbeing.
Leaving you with something even more valuable – time. Time to spend with your loved ones, enjoying life to the fullest.
Read more: Why it’s important you work with a financial planner you know you can trust
If you want to review whether a passive approach is right for you, get in touch
If you’re worried about your investments or are constantly spending valuable time and effort overseeing them, adopting a passive approach might be right for you.
It could be the boost to your emotional and financial wellbeing you need. The first step is to reach out by contacting us at info@grey-parrot.co.uk or calling 02039 871782.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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