Month: June 2019

Market-Timing: Should We Try To Beat The Financial Markets?

by Travis Blau

 

 

The essential

  • In the medium to long term, investments suffer from market-timing
  • More than 90% of managers do not beat the markets
  • It is important to invest early and regularly to optimize risk management
  • A steady, long-term investment multiplies your gains

Sector studies, price comparisons, estimates of volumes processed, macroeconomic or technical data are analyzed daily by financiers to estimate the appropriate time to buy or sell such assets.

According to historical data, market-timing expectations that aim to invest and sell in a timely manner in order to maximize returns and therefore predict its direction through these indicators are almost impossible to apply, while long-term performance term are strongly influenced by only a few daily performances.

 

The difficulties of market-timing

 

The difficulties of market-timing

 

Since its inception in 1998, the annualized performance of the MSCI World Index (a proxy for equity market behavior around the world) has been 5.1%. By missing only the 5 best sessions on almost 20 years (from 31/12/1998 to 01/03/2018: 5,000 trading days), the average annualized performance would have fallen to 3.94% per year!

Worse, by missing the 50 best sessions on the same period, the performance would have even been negative and equal to -4.41% per year or a total loss of 58% over the period!

In addition, 6 of the 10 best Sessions of the MSCI World are within 3 weeks around 8 of the 10 worst trading sessions!

This theory also holds true with many other indices such as the Stoxx Europe 600 (European equities), the MSCI Emerging Market (emerging country equities), the S & P500 (US equities) and many others! And the results are surprising:

 

Example for a capital of € 100,000 invested on the first day of listing the index

Professional managers do not beat the markets

 

Professional managers do not beat the markets

The data of the study

According to a SPIVA * study, conducted more than 15 years ago, which monitors more than 10,000 funds, more than 90% of market-timing managers do not beat the markets over 10 years.

This SPIVA study states that foreign exposure funds underperform their benchmarks more broadly. The size of the funds also seems to be an important parameter because globally the largest funds perform better than the smaller ones.

Finally, the study adds that fees have a significant impact on returns.

The latest analysis of the Spiva study on US markets, published on March 15, 2018, tells us that despite the good performance of the end of the year on the stock market with a gain of 21.83% for the S & P 500 on the year, 52% of managers investing in large, mid-sized and small-cap stocks do not beat the benchmarks in 2017.

Worse, over 5 years and 15 years they are respectively 87% and 94% of them who fail to beat the indices.

These figures largely support the assumption that it is particularly difficult, if not impossible, to achieve long-term and repeated market expectations.

The market: the result of managers, fees, and luck ...

The market is the result of the behavior of all the managers to which we can add the costs and a certain luck factor.

Indeed, imagine leaving 10 managers in a room and ask them to exchange: knowing that prices are set by the balance between supply and demand, half of the managers will be below the average price which represents a subscript, and the other half will be above.

Add now the fees applied by each of the managers and which impact your performance logically, that is when more than half of them are below our benchmark.

Repeat the process several times and it will almost never be the same that will be above the index, so it is partly a question of luck for those who are ...

Time in the market rather than market-timing

Time in the market rather than market-timing

Risk management

Therefore, in terms of risk management, it is better to forget the market-timing .

It therefore seems wiser to allocate investments over time and to invest the available liquidity now and then regularly and systematically, whether the markets are up or down, which makes it possible to obtain a price. means of reasonable entry while ensuring optimal risk management.

Cumulative interest

In addition, investing over 10 years with a return of 5% is much more interesting than investing over one year for a yield of 5% because the compound interest of your investment will finally win you 62% over 10 years!

Reduced fees -> ETF

Rather than wasting time, energy, and money, it is important to invest at the level of the accepted risk in relation to profiles and projects, and to choose financial supports that are cost-effective. : especially ETFs, in order to optimize your returns.

An ETF (Exchange Traded Funds) or tracker is an investment fund, ie a basket of stocks and / or bonds, which replicates the price of an index (such as the CAC40). Trackers have the advantage of being inexpensive. Indeed, the automatic replication of an index involves only a few human resources, so that their costs are up to 10 times lower than those of traditional funds.

The cost of ETFs is on average 0.25% against 2% for a traditional fund which can have a considerable impact on your return.

According to Morningstar, assets under passive management in Europe increased by 25% in 2017 and more than doubled over the last four years.

To learn more about ETFs, we invite you to read our article: What is an ETF (or index fund)?

Conclusion

In summary, it is therefore a well-thought-out allocation based on your objectives and your investment horizon that will bring a real added value to the latter, rather than a risky and ineffective attempt to anticipate a market whose result is more of luck than analysis and experience.

What Nalo does for you

 

Nalo is a specialist financial investment company that offers a 100% ETF life insurance policy under mandate. You benefit from all the benefits of life insurance associated with those of trackers.

We recommend a tailor-made portfolio and adapt your allocation to your financial objectives and your heritage environment. Your benefits are regularly adjusted according to economic and financial conditions and we gradually secure your investments according to your investment horizons.

In addition, ETFs make it possible to invest in several hundred companies and are managed automatically. Rather than trying in vain to beat the market by selecting companies using a risky method, these funds replicate a stock market index at lower cost. Fees being lower, the performance returned to our customers is only better.

 

Are Eco-Friendly Investments Less Efficient?

by Travis Blau

 

The essential

  • The performance of eco-friendly investments is comparable or even slightly better than that of traditional funds
  • The Ecological and Responsible Asset Selection Method can, however, reduce the diversification of your investment portfolio
  • In order to reduce management costs, the use of ETF ISR is recommended

Today, the most common way to achieve sustainable and green investments is to opt for SRI investment funds ( Socially Responsible Investment ). They have the advantage, just like traditional funds, of being able to be invested in your life insurance, your PEA or your securities account.

The first SRI funds appeared in the 1970s, but remained confidential until the 1990s. They are now widespread. At the end of 2017, SRI investments totaled more than € 1 trillion in assets in France and more than € 30 trillion in the United States. By choosing this type of fund you finance companies that have a development policy that respects the environment. Nevertheless, as with any investment, there is the question of its performance. However, the history of SRI funds is now long enough to reliably measure their performance and to have the opportunity to compare it to that of traditional funds.

Read also: the operation of the rating agencies of the ESG criteria

SRI performance: comparable to, or better than, traditional funds

SRI performance: comparable to, or better than, traditional funds

What does academic research say?

Several studies have been conducted to measure the performance of green and socially responsible investment funds and all go in the same direction: the use of responsible investment criteria is neutral on performance. In some cases, these criteria even have a positive impact on performance.

Yet this empirical result is counterintuitive. It even goes against the financial theory. By excluding certain companies from their investment universe, for ethical reasons and not for financial reasons, such as those selling arms or tobacco, these funds are depriving themselves of potentially performing financial securities.

To be sure of their claims, researchers have compiled more than 80 economic studies on the subject allowing to have a global vision on all asset classes (stocks and bonds) and on all areas geographical. The authors of this meta-analysis conclude: "There is no performance penalty for investments made on the basis of ESG (Environmental, Social and Governance) criteria".

More efficient eco-responsible stock indexes

It is also possible to measure the performance of eco-responsible investments based on that of the SRI indexes that have been developing for several years. These indices function as traditional indices except that they filter certain companies according to environmental and social criteria. Comparing these SRI indices to traditional indices, we realize that there is no penalty for ecological and responsible investment.

As an example, the evolution of the price of the Euro Stoxx 50 index and its SRI equivalent, the Euro Stoxx ESG Leaders 50 indicates that the latter is more efficient although very strongly correlated to the standard index. This observation is identical to that which could be made for the equity indices of the main geographical areas.

 

Compared performances of the Euro Stoxx 50 and Euro Stoxx ESG Leaders 50 index

 

Varied management methods with not always identical performances

 

Varied management methods with not always identical performances

 

Inclusion vs. exclusion

There are several methods of investing SRI. The most common is the so-called "best in class" method, which consists in selecting, in each sector of activity, the best-rated companies in terms of ESG criteria . On the other side of the spectrum, so-called exclusion methods will voluntarily exclude sectors considered as harmful. If today, most funds use a combination of exclusion and inclusion with an emphasis on the latter, it has been shown that purely exclusion methods are, they, detrimental to the performance because too restrictive on the investment universe.

A less good diversification

If the exclusion method is less efficient it is because it strongly reduces the diversification of the fund. The same is true for thematic methods, which, for example, will invest only in renewable energies or in companies specializing in water treatment. By focusing on a specific industry, these methods reduce the number of companies invested and increase the impact of a failure on one of your investments. They expose you to a sectoral macroeconomic risk, which could harm all companies of the fund and deprive you of successful companies, whose impact on the environment is positive but whose economic activity is different.

How to build an efficient eco-responsible investment portfolio?

 

How to build an efficient eco-responsible investment portfolio?

 

Maintain good diversification

 

On the whole, SRI funds perform just as well as traditional funds. On the other hand, as we have seen, some funds may lack diversification. In building your portfolio, care must be taken to maintain a good level of diversification:

  • choose several "best in class" funds to cover all geographical areas (European equities, US equities and emerging market equities);
  • avoid funds whose geographical coverage is too limited, for example French equity funds;
  • limit thematic funds to only part of your portfolio.

In order not to have an exposure to the equity market exclusively, know that there are also SRI bond funds or "Green bonds". Note that to achieve such an investment, the PEA is not suitable. On the other hand, some life insurance and some securities accounts offer a range of SRI investments large enough to meet these prerequisites.

To know how to choose the right tax envelope .

 

Reduce costs with ETFs

As with conventional funds, attention should be paid to management fees and potential entry fees or outperformance fees. These fees reduce the performance of the fund accordingly. In this sense, index management, ie the use of ETFs (also called trackers) is more efficient than traditional management. Fortunately, in recent years the SRI ETFs have become more democratic and it is now possible to design a globally diversified allocation made up of ETFs only, the fees of which will not exceed 0.4% annually (compared to 1% to 2% for traditional funds). . So all the tools exist to reconcile financial performance and ecological and social performance of your investments.

To find out why ETFs are preferable to traditional funds .

 

What Nalo does for you

 

What Nalo does for you

 

Nalo is an investment company dedicated to individuals. When we support you, you can choose an eco-responsible investment portfolio composed exclusively of ETF SRI. For you, we take care of implementing an investment strategy that corresponds to your objectives and your heritage environment.

Your investments are realized within a life insurance in order to profit from a favorable taxation .

You can make a free investment simulation on our website .