Moneyfarm’s key aim is to help people achieve their financial goals. Naturally, our investment strategy is a central element of our proposition as a wealth manager, built solely with the purpose of achieving that key aim.
In the first of a series of posts explaining our investment strategy, we’re going to define the key tenets of our wider philosophy. From the inherent value of investing to the importance of professional guidance in reaching your financial goals, there are some key drivers of long-term returns and they represent our fundamental principles.
These are, essentially, rules for investors and wealth managers to live their financial lives by, principles that have guided our investment philosophy and served as a basis for the entirety of our service.
The value of investing
Fundamentally, we believe that people should invest in financial markets. Traditionally, cash holdings have been viewed as a safe haven for long-term saving, but this is no longer the case. Low interest rates and moderate inflation can erode the true value of cash over time.
By investing, the probability of losing money is, of course, more than 0%. If inflation is higher than interest rates, though, the probability of losing money is 100%. We want to do more than preserve the wealth of our investors – financial markets can help people realise their long-term financial goals. Whether it’s growing a pension or saving for university fees, we believe our investment strategy gives people the best chance of succeeding.
Let’s talk about returns. Returns are, naturally, the main reason that people invest, but the underlying factors are slightly more complex. When we think about investors, we rely on two key assumptions. Firstly, investors are risk-averse. This means that when we expose ourselves to risk, we want to be duly compensated for it. Secondly, cash availability is a privilege, and when we give up this privilege there must be compensation.
Our economic foundations
Firstly, we look to manage risk. This is, in many ways, as important as hunting for returns. We don’t have perfect foresight – no one does – so we think in terms of probabilities rather than absolutes. We forecast a range of outcomes and factor them into our portfolio construction, before testing them across a range of different scenarios. In an uncertain world, we believe this produces better outcomes for our customers over time.
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Secondly, our strategy is based on long-term thinking. Time is an investor’s greatest asset. Focusing on the long-term allows investors to both absorb any short-term volatility and to take full advantage of any compound interest they accrue. With enough time on their side and a sound plan in place, investors are likely to reach their goals.
Thirdly, we look to keep costs as low as possible. It goes without saying that costs are one of the key factors that determine the success of an investment. So, controlling them becomes an important part of any investment strategy. Both the structure of our business and the investments we make are heavily influenced by the need to keep costs low, which ultimately means our customers can reap greater returns.
Finally, diversification is all-important. Investors shouldn’t concern themselves with “beating the market” – we think this is a distraction. A truly diversified multi-asset portfolio will have the right blend to create positive real returns over the long-term, reducing a client’s probability of loss. Diversification also allows us to create portfolios that are in line with an investor’s attitude to risk.
Guidance as a service
Traditional financial modelling is based on the assumption that people act rationally, processing all available information before making a decision. This is demonstrably not the case in practice. Cognitive biases and aversion to uncertainty can lead people to make mistakes or lack confidence in their ability to manage their money.
The clearest example of this comes when markets drop. A common reaction in the midst of a downturn is to want out, to sell your assets to avoid losing any more to the markets. What this ultimately leads to, though, is the crystallisation of the losses accrued and the subsequent inability to make that money back when markets recover (which they, historically, always have done).
Key to Moneyfarm’s proposition is our team of investment consultants. The team is on hand to lead clients through the initial investment journey, as well as providing support as and when it’s needed. Our investment consultants help our customers to understand their goals, define the appropriate risk level for them and support through periods of market volatility. We’ll go into greater detail about our team of consultants in a later post, but they form a fundamental part of our wider investment strategy.
The next piece in our series will focus on what we offer our customers. We’ll explain the set of solutions we’ve created to serve our customers across the entire investment journey.