As the Director of Investment Research at the noted equity research firm, Cambridge Associates, Ian Kennedy studied market movements and investor performance extensively through multiple bull and bear markets. And Ian has now compiled this wealth of experience and knowledge in his book Simple Smart Investing: A How-to Guide for Everyone which Steve endorses as an indispensable how-to guide for everyone, as the title suggests.
Understanding The Market
In the book, Ian notes that the principal factors in successful investing are understanding the historical aspects of the market, and knowing your risks and how to navigate through periods of turbulence. Ian also emphasizes that investment advisors can be extremely useful allies, particularly in stormy financial waters, but that choosing an appropriate advisor is absolutely critical. Ian cautions against trusting your investments to some of the less scrupulous financial ‘consultants’ out there, who are merely salesmen looking out for their commissions, not your financial well-being.
This scenario is especially common when there is market instability and you, as an investor, are feeling frightened and insecure. In this context, Ian discussed some key points to look out for when choosing an advisor.
Steve and Ian went on to discuss the folly of forecasting, which doesn’t work simply due to the multitude of variables which can affect the market. Attempting any kind of long-term forecasting on such issues as interest rates, the stock market, and so on, was described by Ian as “folly”. In fact, smart investors recognize that even predicting the market over a very short period of time is nigh on impossible, so this should never be part of your overall investment strategy.
And they also delve into an interesting conversation on active and passive investing. With regard to this, Steve and Ian also discussed the danger of being glued to media coverage of the market, which trumpets every fall and climb, and can give a very misleading impression of the fundamental factors behind such movement; which often aren’t even known, let alone understood!
Diversifying Your Portfolio
The conversation finally touched on the importance of diversifying your portfolio, and how this has become much harder due to correlation between markets. Ian had some valuable advice on how you can overcome this hurdle, and protect your investments and personal wealth.
The insights in this interview could significantly change the way you manage your money and potentially increase returns in your portfolio, so it’s one not to miss.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: My next guest is Ian Kennedy, former Director of Research at Cambridge Associates, which is a global investment firm serving institutions, and he’s the author of a new book, Simple Smart Investing: A How-to Investment Guide for Everyone. You know, this is one of those books that I should have written, but he beat me to it, and I can tell you it’s a fine book, so I’m going to recommend it to my listeners: Simple Smart Investing: A How-to Investment Guide for Everyone. I have Ian Kennedy on the phone with me right now. Welcome, Ian.
Ian Kennedy: Thanks, Steve, Hi.
Steve Pomeranz: Hi. Let’s just get started with the topics that you speak about.
Ian Kennedy: All right.
Steve Pomeranz: In this day and age when you’re in a bull market and you’re invested in the market, it’s easy to think of yourself as a genius. In a bull market everybody’s a genius. It’s only when the tide goes out do you know who’s been swimming naked.
Ian Kennedy: That’s it.
Steve Pomeranz: You know… to quote WarrenBuffet. One of the things you address right now is, should you do it yourself or hire an advisor. Tell me what you’re thinking.
Ian Kennedy: Yeah, well, I stress, Steve, that I think most people simply don’t have the time or knowledge or experience needed to go to learn like that, so they probably should get an investment advisor to help them, just as you would get a lawyer to help your legal affairs or a doctor to help with your health care issues. The problem is that most so-called experts are really just salesmen for financial service firms eager to make money from you, rather than for you. These are shark infested waters. That’s why I spend quite a lot of time in the book trying to give people a map for how to go about identifying and hiring the right kind of investment advisor who does not have a conflict of interest, vis-à-vis your interest.
Steve Pomeranz: Good point. As a matter of fact, in my market commentary today, I spoke just about that same topic. Give me one or two ideas of what people should look for when they’re talking or interviewing a financial advisor.
Ian Kennedy: Well, the first is that you’re looking for somebody who does take fiduciary responsibility for the assets, which is not the case if you’re talking to a so- called financial consultant at Merrill Lynch or J.P. Morgan or somebody like that. They are not obliged to identify themselves as taking fiduciary responsibility. They really are just salesmen who try to sell financial products. The second is this: I don’t believe that, except for exceptional circumstances, you should hire somebody who’s compensated by earning commissions on products sold to you because that means that person has a conflict vis-a-vis your interest in pushing certain kinds of products that he or she will get paid for, rather than others that might be better for your portfolio.
Steve Pomeranz: Well, Ian, let’s say I do decide to do it myself. I’m just that kind of a guy, right? I’m an engineer, and I just built my own gas grill outside, and I don’t like to hire advisors. What are some of the things that I need to do to be my own financial advisor.
Ian Kennedy: Yeah. That’s a very good question. I think the first thing you need is an understanding of two very important matters. The first is, if you don’t have a good grasp of capitol market history, you’re really going to be just swimming on the waves of current news events washing you back and forth. You really need to get a grasp of the long term perspective, so that you can invest appropriately for whatever purpose you’re investing for. The second is, I think you really need to work hard to try and understand what constitutes investment risks. What are the risks that you’re exposed to that we’re all exposed to when we invest money, and how can you ensure that you can navigate the very difficult periods when risk sort of steps up and starts biting us?
Steve Pomeranz: Well, this is all addressed in the book. We’re not going to get to all of these issues today. The book is Simple Smart Investing: A How-to Investment Guide for Everyone. Let’s move on. In your book you state that the value of forecasting… Tell us, Ian, what is the value of forecasting?
Ian Kennedy: Well, as one of the people I quote in the book says, “The reason that people use the word guru is that charlatan is such a difficult word to spell. That applies in spades to forecasting. We know from all the objective independent research that’s been done on forecasts that, in fact ,they’re useless. You’re just as well flipping a coin. I’m talking about forecasts of where interest rates are going to be in six months. Where the stock market’s going to be in six months, and so on, and so forth. It just simply can’t be done. We find this terribly unacceptable because we just can’t let go of the notion that we have to have some sense of how the future is going to play out for us, to make decisions about it, which is perfectly rational. The people who talk about the market and give their views about what could be happening in the marketplace, the really good ones are always at pains to say that they know that they can’t forecast what’s going to happen in the short term. What they’re really just trying to do is to paint the picture of some of the dominant issues that are at play in the market today, and I think that is useful.
Steve Pomeranz: Do you remember Peter Lynch, the money manager?
Ian Kennedy: Absolutely. Magellan Fund.
Steve Pomeranz: The Magellan fund. He said in his book that the one reason he thinks he made so much money for his shareholders was that there were no economists on the payroll at Fidelity.
Ian Kennedy: Yeah. I mean, I would agree with that.
Steve Pomeranz: All right, let’s move on. The next one is controlling the media input into your brain. Tell us about that.
Ian Kennedy: Right. Well, you know we get flooded twenty-four seven with such an enormous battering of information and news and views about the market. All of this kind of encourages us to think that it’s really important what’s going on today, what went on this week, and so on, and so forth. Whereas with most of us, if we’re investing for our retirement in twenty years, our children’s college education in fifteen years, the really important time horizon is twenty years or fifteen years and that’s not at all what most of the media are focused on. The media also spends a lot of time trying to create this cause and effect. Well, the market goes up, the market goes down. The truth is, the market fluctuates, and we don’t really know what is driving it day to day. We do have a better sense of what’s driving it over a twenty-year time horizon. That’s a whole different story, but the problem I think with people spending their time glued to CNBC and so on, is that they get caught up in this short-term focus that really is detrimental to their long term financial interests.
Steve Pomeranz: The one thing that I find, too, is that as the weeks progress after a certain event has happened, maybe the market has gone down and so on or there are some political events, that everybody then seems to know what the reasons are for everything, but as soon as everybody forms a consensus, then it’s automatically incorrect.
Ian Kennedy: Right. Well, I think that’s typical, and, of course, we have to remember that the stock market is a kind of discounting mechanism, so there’s no point in making investment decisions in the stock market in response to today’s news. You have to know tomorrow’s news. That’s very difficult.
Steve Pomeranz: That’s right. It’s what’s different tomorrow that’s going to drive something, not what’s happening today.
Ian Kennedy: That’s exactly right,Steve.
Steve Pomeranz: All right. Let’s move on. This great debate of active investing versus passive investing. Just let me say very quickly, passive investing is a broad term meaning index investing and not trying to pick individual stocks, or to actively manage a portfolio to try to beat the market. That would be active managing. Passive managing is the opposite of just playing the whole market and letting it do it’s thing. Where do you come down on that debate?
Ian Kennedy: Well, the vast majority of investors should be predominantly, passively invested in index funds. The reason for that is based again on research over many, many decades. There’s a whole mountain of research that’s been developed that shows that actively managed funds, this is both stock and bond funds. Two-thirds of them over virtually any time period of consequence, three years, five years, ten years, underperform relative to the market index. The problem is that contrary to what most of the service firms would like us to believe, we also have no way of knowing which third are going to be the ones that outperform in the next three, or five, or ten years because they’re not going to be the ones that outperformed in the last three, or five, or ten years, and so we have this problem. A, two-thirds of the funds are going to underperform, and B, we don’t know which ones are going to do better in the future.
Steve Pomeranz: The passive will take into account all of that problem. It will kind of handle that problem because, I guess in the long run, it all washes out. I often say that if we were all Rip Van Winkle none of it would matter. We’d wake up twenty years later, everything would be worth more. The equity markets, DOW would be higher and so on. The only difference is that during any period of time you will have managers that are talented and will outperform.
Ian Kennedy: Absolutely.
Steve Pomeranz: I just think maybe you’re saying it’s hard to know who they are and in advance, perhaps.
Ian Kennedy: Right.
Steve Pomeranz: Unless you have someone like Warren Buffet, but even he goes through times. Actually, he just went through a five-year period where he didn’t even beat the S&P 500.
Ian Kennedy: That’s right.
Steve Pomeranz: Over a long time, he’s basically just killed the S&P 500, so there are talented people out there. Also, one point that I’d like to make, Ian, is that in some areas of the world, I think active investing is absolutely necessary. If you’re buying a merging market or a merging market bond and some of these more esoteric kinds of investments that aren’t all that liquid, I think it’s good to have a manager behind the wheel because even in the bond market area, too. I think it makes sense to have someone buying the bonds because these ETFs and these passive index funds may at some point get into trouble because they’re not stocks. They’re not traded as liquidly as stocks, so you may want your own portfolio in that degree.
Ian Kennedy: Right. I mean certainly imagine liquidity in the bond market today, the corporate bond market is very important. I’m actually against people owning corporate bonds, except very short term sort of cash substitute corporate bonds. I think people’s bond investments should be in municipals where there isn’t an index fund you can use. You really need to have a manager and in treasuries as a kind of protection against really bad economic declines.
Steve Pomeranz: Let’s talk about diversifying. People say they’re diversified. They believe in diversification, but you really find very few portfolios when done on their own that are actually diversified.
Ian Kennedy: Yeah, and it’s harder these days to diversify because the correlation among markets, whether US and other developed markets, or US and other developing and emerging markets has become much higher. The world’s stock markets have tended to converge over a longer period. This could change again, of course, in the future, we don’t know, but I think it is sensible to have money in all the markets around the world, not just in the US to have a globally diversified portfolio. I think it’s important that people understand that unless you re-balance your portfolio among the different major asset groups like stocks and bonds, and, if you have them in an IRA or something and so on. Unless you re-balance back to your target allocations, which you should have, then you completely undermine the whole purpose of diversification.
Steve Pomeranz: Right. I think a lot of people let their allocations run too long and are afraid to re-balance. Well, unfortunately, we’re out of time. My guest Ian Kennedy. The book is Simple Smart Investing: How-to Investment Guide for Everyone. I think it’s a great primer on the markets, and I highly recommend it. Ian, thanks for taking the time to join us.
Ian Kennedy: Oh, thanks, Steve. I appreciate it. Enjoyed it.