Here’s a regular question about this column – “how come you don’t talk about which shares to buy and sell?”
Firstly, I don’t invest in individual shares, so I’m not inclined to advise other people to invest in something that I wouldn’t.
The obvious next question – “so why don’t you invest in individual shares?”
Decades of research has proven it to be thankless process due to extra effort, extra risk, less diversification and no proven reward.
Recently, the man behind much of that research, Eugene Fama, finally received due credit for his work.
Fama was awarded a Nobel Prize in Economics for his empirical analysis of asset prices.
Since the 60’s, Fama and his colleagues have studied share prices and have been able to demonstrate prices are extremely hard to predict and new information is quickly incorporated into share prices.
Basically, we can all analyse companies until we are blue in the face, but we won’t know any more than any other investor.
And by the time new news emerges, it’s too late to benefit from it because the market quickly prices it in and it’s reflected in share prices.
These findings gave rise to passively managed index funds which track the market (or sections of the market) without wasting time guessing what will happen next or which shares will outperform.
Here investors also benefit from diversification given the number of shares within an index.
Fama’s other research has shown the only way to increase returns is to increase known risk factors, specifically risk factors that have previously rewarded investors.
Shares are riskier than bonds and offer higher expected returns, while small and value shares are riskier than large and growth shares and offer higher expected returns for the risk taken.
And for investors there’s one important endorsement for Fama’s research – Wall Street hates it.
As Fama points out, “it says they (Wall Street) don’t do very much and they don’t like that, given that they charge high fees for not doing very much!”
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances. Searching for the top financial adviser in Australia?
