Investment: Rise above the noise

Can I beat the markets?

The good news is that the investment markets themselves deliver nearly all the returns in your investment. So there is little need to worry about timing your investing in and out of the stock market or picking the best stocks.

Getting your investment philosophy right

The two most important money management questions are:

  1. Is successful market timing possible?
  2. Is superior security selection possible?

Most investors will fit into one of four world views depending on their answers to these questions:



The Quadrant 1 investor expects to both profitably predict the short-term movements of different asset classes and choose securities which will outperform the asset class as a whole. Most individual investors fall into this quadrant with the encouragement of the media.

Quadrant 2 investors (including most investment professionals) know they cannot predict market swings accurately. But they believe it is possible to choose the securities within a particular market that will outperform the market as a whole.

Quadrant 3 investors believe that whilst there is no point selecting individual stocks within an asset class, they can maximise gains by jumping from one asset class to another. The strategies described by Quadrants 1 to 3 are known collectively as active strategies. The reality is these methods fail to even match the market return, particularly after costs and tax over the long term.

The Quadrant 4 investor believes that markets are efficient, and that security prices are moved in the short run by surprises that people cannot foresee. Or at least, markets are efficient enough so the costs of Active money management strategies outweigh any small advantages gained. This is our world view and the one backed up by most academic studies. This world view demands that advisers don’t concentrate on the money, but on the client and their targets and risk profile instead and structure their portfolio accordingly.

Whilst it is not possible to consistently beat the market by timing or picking stocks, the good news is we don’t have to do either to have a successful investment experience. This may be the first time you have been asked to accept that the Quadrant 4 or Passive Asset Class investing is the optimum money management strategy. So let’s look at some of the reasons why Passive Asset Class investing is not as widely accepted as PageRussell believes it should be.

Individual investors

It is a central tenet of western culture that if you work hard enough success will follow. So it is intuitive for people to believe that if they (or their financial adviser) turn over enough stones they will find some gems. The facts are that this is not the case with investing. The main reason for this is the market is not made up of amateurs, but sophisticated professionals. The investment banks now have computers constantly scouring the internet for news and executing trades based on that news within milliseconds. The other reason is that this trading activity costs money, which outweighs any potential gains from the stock picking or market timing.

Humans are driven to want ever more. It is one of the fundamental drivers of human evolution and progress. So it is not surprising that investors are reluctant to accept, ‘just’ the market return and are susceptible to promises (implied or otherwise) of better than market returns. Accepting the Quadrant 4 world view means accepting there is no such thing as a free lunch. The benefit of long-term return of capital markets comes with uncomfortable short-term volatility. This is a harsh reality for most investors to accept; it is no wonder they stick with their hopes.

Investment professionals

Most investment professionals reject the Quadrant 4 view as it threatens their existence.

The financial media

The job of financial journalists is to write exciting stories. The media will always either highlight the latest financial scandal (fear), or feed the notion that you can beat the market (greed). The Quadrant 4 world view is too boring to keep writing about. It would be nice if all our clients came to us already knowing that passive asset class investing is the optimum strategy. But we need the majority of investors to believe they can beat the market. We want them to go on expending the effort, because that creates the market returns we harvest.

The good news

The good news is we don’t have to be market timers or stock pickers to have a successful investment experience. This is because investment mix – or asset allocation – accounts for over 90% of the performance of an investment portfolio. pr-distinct-parts-4a