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How to select the right stock and bond markets

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To acquire wealth for 'independence', a common choice is to invest in share and bond markets. In the fourth of a mini-series, Rob Noble-Warren, asset manager, explains the process to decide on the right markets.

Many people have decided that the best way to invest capital for retirement is by investing in deposits, or property, or in fixed interest such as peer-to-peer lending, which we covered in earlier articles in this series. For less personal time, and often less risk, people often choose to invest in world bond and equity markets. But – which markets?

Retail investors often believe that a financial institution is there ‘to make them money’. It is as though we really want to buy a complete ski holiday experience, but instead just hire the skis and buy a ski pass. The ‘absolute return’ funds, or those that call themselves ‘managed’ often undershoot the best from world markets – often by such a margin one wonders who they are managed for. The problem is that the world is changing. Since 1999 the UK share market has moved sideways.

Part of the reason is the banks’ ability to generate large profits has been clipped: another part is the 70 per cent of GDP debt the UK now carries. Even before the crash, we had declining productivity and the 2000 ‘tech’ boom and crash. If UK shares grow only weakly, at an average 4 per cent, instead of 8 per cent, people investing in the very place their parents benefited from so hugely will retire 15 years later than their parents.

There is no need to invest just in UK shares. There are US shares, Indian, Australian property, Nigerian oil, Canadian infrastructure, Thai, Korean, Vietnamese and South African shares, to name a few. JP Morgan provides a forecast of return from world markets annually – always a good place for a DIY investor to start (just search online).

Some asset managers add ‘asset allocation’ to their specific buy and sell advisory recommendations, and although many require £2m under management, some start at only £200k. These managers combine the historic risk and returns of world markets to measure the historic ‘best return for a specified risk’ as a benchmark for their own
performance, and to compare with an investor’s own to see if improvements can be made. For ‘average’ risk, the benchmark has been 7 per cent p.a. after transaction charges as a trend starting just before the Credit Crisis of 2008. Investors commonly do not know their own performance off-hand, but it is easy enough to work out – if anyone emails me, I’ll send you a simple spreadsheet.

DIY Investors often stampede from one market to another – for example at the time of writing, they will have seen the 100 per cent increase in bio-tech shares (mainly US) and wondered if they should join in. One simple technique asset managers use is to refuse to buy when a security is priced well above the 26 week moving average, as provided on the site (for free). With a set of rules in place for buying and selling, a DIY investor can achieve 7 per cent as a trend with only dealing charges to pay. However, a DIY investor will need 10 hours a week research time. For an asset manager to do that for you, be prepared to pay 1 per cent p.a., and if you are choosing one, ask to see evidence of their actual performance over the last seven years.

Rob Noble-Warren, an author, award-winning asset manager and chartered tax adviser, is writing in for high net worth investors who like making their own decisions, and find that investing directly gives them more choice, less charges and more customisation.


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