Financial Times - If you do one thing with your money in 2016 . . .

Buy an investment you can forget about

The saying “Cobbler’s children have no shoes” exemplifies the tendency for professionals to concentrate on their work and neglect their own needs — even in their own area of speciality.

Investment professionals are not exempt from this tendency. But if you don’t have the time or inclination to manage your investments every day or even every week or month, then surely the best option is to adopt an investment strategy which can prosper as a result of this apparent neglect.

I say apparent neglect because combined with the right investment strategy such inactivity is a virtue as it cuts dealing costs, which are a significant drag on investment performance.

In my view there are two obvious routes to achieve superior investment performance without the need for constant vigilance or activity.

One is to buy an index fund. Given that the average active manager underperforms the relevant index benchmark, charges more than an index fund and deals more, this outcome is inevitable. I mean an index fund, not an exchange traded fund (ETF). Given that the rationale for this strategy is your lack of attention, why would you want a fund which allows intraday dealing, which is what the exchange traded part of ETF is telling you it provides?

The other route is to invest in a portfolio of equities in good companies which can be relied upon to compound in value over time. Such companies have been around for decades or longer, have good financial results (high returns on capital, high margins, good cash conversion of profits and moderate debt levels) even at the bottom of the economic cycle.

They also have identifiable competitive advantages which should enable those returns to persist despite their obvious attraction to competitors.

Whichever of these routes you choose, buy them, forget them and enjoy the results.

Click here to view the full article on FT.com. 

Terry Smith 

Financial Times