You can't beat the market

You don’t need to own stocks. You need to own the market

John Bogle, founder of Vanguard Funds

Active investment management, or market timing and stock picking, is hard. Or impossible. There is now an abundance or empirical evidence to confirm this.

It relies on predicting the future. How can we?

Every day we awake to the unexpected. Earthquakes, flooding, reputable banks in crisis, London bombings, 9 / 11.

So how do you protect yourself?

Own the whole market, not just part of it

You can only protect yourself from the stock market by not investing all your money in it. And, by holding high quality fixed interest which will tend to provide a return even when markets fall thus smoothing your experience.

You can’t protect yourself from general stock market risk.

You can protect yourself from individual company or sector risk

The investment returns from the sum total of human endeavor is cheaply and freely available by having an equity stake in all the companies that act as a conduit for that endeavor.

This is easily achieved through investment in the appropriate fully diversified index and passive funds which can hold thousands of companies worldwide for very low costs.

Rather than active investments and trying to pick winners, we believe in passive asset class investing

This means deciding which asset classes are worth holding and in which proportion. Then investing in such a way to ensure you are not too exposed to any particular company, sector, geographic region or individual investment manager whilst minimising the costs associated with investment management and trading.

Then holding for the long term while dispassionately re-balancing in a pre-defined way.

Dispassionate re-balancing

All asset classes move in cycles. It is not necessary to forecast or predict these cycles but it is important to have in place a pre-defined strategy of how you will deal with the inevitable asset price movements to keep your exposure to risk constant.

This enforces the discipline of sell high buy low which is the opposite of our natural inclination to buy high and sell low.