Richard Cayne on Active or Passively managed Funds ? Does it really need to be either or could it be Both?

 

Active or Passive? Does it really need to be either or could it be Both?

With all the economic turmoil, issues and virus concerns seemingly everywhere you turn, in markets all over the world, many people are trusting managers of active investment products. Why pay higher fees for players in a rigged, or at the very least an incredibly tumultuous, game? Passive investment managers charge lower fees whose decisions are dictated by a pre-determined structure and strategy.

“This is a very black and white point of view that will do your investments more harm than good,” says Richard Cayne of Meyer International. Richard advises his clients to carefully consider both strategies – they each have their pros and cons, and they both can be part of a profitable financial plan.

What is active investing?

An active investment manager is actively engaged in deciding what and when to buy and sell. This sounds simple, but it is actually a very complex, involved commitment. The manager must research extensively and be able to quickly absorb and analyse market data to make decisions that will beat the market. Considering all the variables that affect a financial instrument, this is a profound undertaking. This is why active investment managers charge higher fees. But how well do they perform? In recent years, not so well. According to Morningstar’s Active/Passive barometer, active funds have been underperforming passive funds, especially over longer time periods.

So why bother with them? Under certain conditions, active investing can pay off very well. Before you hand your money decisions, do some research. Is the manager an expert in the fund sector or emphasis? If the strategy is too general, this usually does not bode well for active management. Also, success with this strategy often relies on being first in to profit most. In more developed markets, this is difficult since there is literally a wealth of information available. Emerging markets and sectors will often require specialised access and insights that can help active investing thrive. Also, active investing can respond immediately to sudden changes in the financial world, like the recent Brexit vote.

What about passive investing?

While active investing relies on an individual analysis of a specific dataset, passive investing looks to the overall performance of a certain group of equities or debts. Passive investing focusses on a certain index like the S&P500 or the DJIA or a set exemplar from a specific sector or exchange. Then investments are chosen that match that given group. The idea is that while it may be hard to predict a single investment that will beat the market, the market, whatever that may be, will perform consistently and, in times of loss, will eventually correct and profit.

So, while passive investing may not reap huge returns, it offers the possibility of dependable, constant returns that investors may feel they have more control over (since they will know at any time what investments are being made).

Now, what to choose?

So, there are many variables that can affect both strategies, for good and for bad. It would then not be wise to write off one for the other. When making any financial decision, all possible scenarios and options should be weighed, from how much risk you want to take to whether you believe certain sectors or markets are worth special attention.

“You really need to be realistic about what type of returns you’re expecting from your portfolio over a set time period,” Richard Cayne counsels. “Both active and passive investment strategies have their place, you just need to be thoughtful about what their places are for you. A good financial advisor should be able to work with you and help you plan appropriate allocation.”

“Also, a lot of people forget that their investment decisions are not set in stone,” Richard adds. “Markets fluctuate, so should you. There’s no need to make adjustments at every report of a downturn or potential economic hiccup, but you definitely should revisit your portfolio regularly with your advisor to make sure it reflects market trends and your risk appetite.”

For more information on this or any other financial topics, please contact Richard at Meyer International in Bangkok Thailand.

Principles of Successful Investing

The 10% Rule

Perhaps the most important piece of advice that can be given to any young person when they first begin earning their living is to practice the “10% Rule”, also known as the ‘Pay yourself first Rule’. Richard Cayne in Bangkok suggests that before you pay any bills, go to any restaurants, buy your favorite CDs or computer games, pay yourself 10%.  That is 10% of your monthly take home pay, without fail, without exception, should be set aside for the long-term.

Time

Life plays tricks on us.   When you are in your 20’s it is difficult to conceive that you will one day be as old as your parents.  It is natural to believe that you will always be young - wrong! Get real because life is going to go faster than the speed of light and if you don’t get your act together right now, you will be in your 50’s before you know what’s hit you with little to show for all those years that disappeared in the blink of an eye.

The financial consultant Richard cayne, says that they have seen many people who sadly are going to be in a poor financial state- because they didn’t pay themselves first!

The early years are crucial, just look at these numbers. At 25, you might imagine that you would like to retire at 55, some 30 years away.  Great,  Plenty of time to save for that. Oh yeah? Don’t you believe it.  Probably you will get married and have kids. Not an unreasonable assumption would you say?  So who is going to pay for their education, food, clothes and all the other demands of parenthood?  This little joy is going to last at least 20 years and believe me if you are not following the 10% rule……

So, how many years do you have for You?  Probably 10 at the most, say the next five years and not again until the kids are off your hands in 20 years time.  So these next few years are absolutely crucial to your long term financial well-being.

The Magic of Compound interest

So, you’ve followed the 10% rule and with a bit of good investment advice from a Financial Consultant, after five years you have accumulated, say, $100,000. Family commitments have now taken priority and no matter how hard you try there is just no way you can pay yourself.  Don’t panic - let compound interest do the work for you.

Let’s say your nest egg is now invested with an annual return of 8% compound. The rule of 72 says that you divide the rate of return into 72 and the answer will be the number of years it takes to double your capital. Every 9 years at 8%.

So, if you are now aged 30, $100,000 will become $200,000 at age 39, $400,000 at 48, $800,000 at 57 but by this time the kids will no longer be such a demand on your wallet and you will probably have started back on the 10% rule again and have accumulated perhaps a $1 million by age 55 - and all done with little effort on your part - just imagine what the numbers will be if you take the matter of wealth creation really seriously.

Investing offshore

So just where do you invest your 10%?  Richard Cayne Meyer International opines that if you are overseas from your native land, you would be advised to take full advantage of the Offshore Investment industry.  This first came about with the expansion of the British Empire and even now it is the British offshore market that is favored by financial advisers.

It is perhaps the most financially sophisticated and, even more important, the most secure. It is situated in both the Isle of Man, in the middle of the Irish Sea and Guernsey and Jersey, known more commonly as the Channel Islands and a lot closer to France than the UK. Though Dublin and Luxembourg are now granting favorable tax treatment to offshore investors.

The investment companies have established themselves as Life Insurance companies to take advantage of the complete freedom from taxation afforded to them by the relevant State Governments. Furthermore,  holders of the insurance company ‘products’ are protected by legislation in the event of the collapse of a company. Depending upon the company’s location, up to 100% of your investments will be returned.