Over the last two years, I've gotten a lot of challenging statements to the idea that I have been beating the SNP500 since I became a Consultant.
Despite beating the SNP500 - fairly easily even - since 2017, I'm not a genius. Let's just say there's a reason that I never consider my annualized return from 2016 (when I actually first started investing and learning how to do it).
Even though I have been an Investment Specialist for quite a while, it always puzzles me when people suggest that this is impossible.
If people truly believed in the inevitability of a low cost index fund, they wouldn't spend all their time and energy on studying value investment principles. So if you think about it, the only thing that I'm really guilty of, if any - is being wildly consistent.
Besides, 100% of index funds underperform the benchmark, compared to only 90%+ of active funds, which is why I wrote this.
But I digress. Since it sometimes feels like I've spent most of my career explaining how I've done the above (the topic), I figured I'd reveal a bit of it here.
In order for me to outperform the SNP500, I typically spend a significant amount of my time having a clear understanding of the widest range of investments globally, sectorally and
Studies from Dimensional Fund Advisors (DFA)* have already demonstrated the benefits from investing across Geographical, Sectoral and Market Caps in a evidence based, studious manner.
Naturally, I apply this across funds that have historically produced higher alpha despite higher expense ratios.
Why would I give up a basic secret or two?
...Well you can read to the end to find out.
An Introduction To Other Parts of The World (e.g. China)
In my investment experience, I've noticed that the US is the LOUDEST country in the world. Perhaps due to it being the global currency, the forerunner in investments, having good ol' Warren Buffett...
But in that same investment experience, the US hasn't necessarily been the forerunner for the strongest investments in the world.
For example - in 2017, both MSCI India and China outperformed the SNP500 by over 30% that year. In 2019, despite a US-China war, the SNP500 only outperformed MSCI China by a few percentage points.
Having invested in Unit Trusts that outperform this benchmark made even more, and lost less the following year during the 2018 correction and 2020's Covid Crisis.
For example, my clients in both Growth and Aggressive China-alone funds outperformed the SNP500 by 18% or higher [as of September 23rd].
I am not SUGGESTING or ADVISING anyone to invest specifically in China or any country through this post. But my point is simple - it's a big world out there, and there are many areas you can invest in.
With the help of an investment specialist who is familiar with the history and expectations for investing in various geographies and sectors - you can create a portfolio that potentially lowers your risk while increasing your return.
Here are some considerations for Geographical risks.
Geographical Risks
1) Politics: The politics of any country are always up for consideration during any particular assessment of whether a country is a good geographical area to be investing in.
For example, the US seems like quite a volatile area to be investing in this year (as it would during any other election year). Conversely, other countries may not have as much political drama.
There's also the issue of taxes or potential corruption, which would certainly hurt the possibility of business value increasing in that country - and by that extension, your investment returns.
2) Natural Disasters: The issue that is most commonly associated with Geographical risks. It can be very hard to consider a business not risky if all your money can be swept away by a tide, literally.
Costs from natural disasters are borne by state and local governments, the federal government, insurance companies, businesses, and individuals. Each of the areas where costs are borne have an implication on your investment and yourself.
For example, if taxes are raised in an area where you have your investment due to a natural disaster damaging it, there is a reasonably decent chance that your expense ratios on that investment will increase, which has negative effects on your net yield.
3) Reputation: This is a highly subjective area, so maybe examples may be easier.
Back in the day when General Electric was the largest stock in the SNP500, Energy was the dominant sector. But movements and demand for clean energy could arguably have caused a decline in demand. Personally, I've experienced quite a few clients who are curious to if they can invest in clean-energy companies instead.
Another example would be the China-Hong Kong issue that is ongoing. Some clients have stated a high mistrust or animosity towards investing in China as they support the Hong Kong movements.
As a Investment Specialist, I'm really only concerned about helping clients make as much money as they can within their risk tolerance - after all, even if I don't like CPF I'd take that 4% and make the best of it - but such is the nature of reputation, and it can affect how much you net in the end.
4) Scope: Where there isn't a clear understanding of an expected area that results in confusion and lacklustre returns, or additional risks.
For example, all companies could be regulated and graded according to a certain risk level, but they could be regulated and graded different depending on which company does the grading. Even between the Top Ratings companies (Fitch, Moody's, SNP), there are typically differences.
Other examples could be denotation of the geographical area - for example, some funds would consider Taiwan and Hong Kong a part of China, while others might not.
Or it could be dilution of a particular sector - for example, REIT bonds (used for leverage) may often be confused for investing in the REITs itself. A lack of clarity in all these areas, especially when exploring an unfamiliar geography, may result in taking unwanted risks if not careful.
Closing Thoughts
Some offhanded remarks from cynics that I occasionally get are:
'Wah, you're a better Investor than Warren Buffett Ah'.
No - even though Berkshire Hathaway is a declining investment, but they did much better than the SNP500 in a 40 year annualized period.
Likewise, it's important to fully comprehend the context of the evidence presented above through a proper consultation.
As an investment specialist, I'd love to speak to you on how to get started, or how to make your portfolio more versatile for potentially higher return and lower risk.
Money Maverick
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Sources: 1) MSCI China 2) iShares SNP500
3) Manulife Investment-Linked Policies
4) Financial Fitness Forever - Paul.A.Merriman*
All other links are attached to the pictures provided.