John Astrup - Investment Product Manager

Because simple is effective

I am incredibly proud of my mum, not only did she do a stellar job raising 2 slightly wayward kids, but she worked in what I believe to be one of the most honourable professions there is – she was a nurse. To this day, I still remember her stories following a busy night on the accident and emergency wards. Surprisingly many of these were humorous in nature and actually astute observations of default human behaviour during stressful situations. More often than not, patients were more interested in taking a pill, which is complex and tangible, over a therapeutic intervention requiring more personal effort and application.

This tendency to seek complexity and ignore simplicity has been alive and well in investment circles for years. One piece of research found with disproportionate amounts of time and effort spent, more mistakes were made and the consequences of these mistakes were more severe. This combined with the fact that there are 45 times more mutual fund options than 50 years ago, makes one realise that most investors are facing an uphill struggle when it comes to where to invest. 

A simple solution to a complex problem

It can be hard to embrace simplicity in a world where complexity has brought so much good. Longer life expectancies, for example, have been brought about by advancements in medicine and technology. But the overabundance of information, particularly financial information in the case of investing, has the effect of intensifying emotions more than it enlightens the mind.

When it comes to simplifying investment choices we have a few potential avenues. We could listen to a TV pundit or get investment tips from our hairdresser. That would be simple, but probably not conducive to our long-term wealth creation. Or we could choose to invest in-line with how we feel about risk, across markets and major asset classes. A simple time tested managed fund.

What is a managed fund?

Whatever your objectives may be, it is a good idea to diversify your investments. One way of achieving this is through a multi-asset fund – a managed fund, which is a ready-made investment solution that helps to manage risk by holding a broad range of asset classes. The most common asset classes include equities, bonds and cash amongst others.

When you invest in a managed fund, your money is combined with other investors, giving you access to a range of asset classes. The value of your overall investment moves in line with the value of the underlying assets. In addition, the fund manager is the responsible entity, buying and selling assets on your behalf. Managed funds offer investors diversification and access to a broad range of assets or markets for a relatively small investment amount.

One of the most important aspects of investing is finding the right balance of risk and reward for your investment objectives. This means understanding your attitude to risk and your capacity for loss. Over the last 30 years, Zurich Managed funds have been managed in line with five clear and defined risk profiles. The Defensive fund has the lowest risk in the range, and the Adventurous fund has the highest. As a result the Defensive fund will likely contain a greater proportion of lower risk assets, such as fixed income securities than the Adventurous fund. The asset allocation mix varies through the funds to match their risk requirements. 

So has simple been effective?

Let’s take a look at the Zurich Managed fund performance summary. 

In the early 2000s, we had a 10-year period where the return for the S&P 500 (US equity index) was negative on a point to point basis. This had never been the case in U.S. history previously. However, if you look at someone who was equally invested among American equities, international equities, real estate, fixed income, and commodities, this person would have made money, about 4.5% annualized over that "lost decade." 

In fact investment periods like this are really only lost to people who aren't properly diversified. Investing is that rare endeavour where confidence is best affixed to something far distant. Confidence in day to day decision making regarding the sale and purchase of overly complex investments is hardly better than a coin flip. But given an appropriate time horizon and a solution like Zurich Managed funds investors can be nearly certain that their patience will be rewarded.

Investment diversification is not a panacea. Nor does it prevent your portfolio from falling, even dramatically at times. What it does, is protect you from losing your shirt on a concentrated or overly complex investment. To put this another way, buying a car with an air bag is not a bad idea even if you never get in a wreck.

Related Resources

Investments 101: The knowing-doing gap

Investment risk, it’s a matter of perspective

Online risk profiler

Keep up to date

Click to follow us and find out when a new article is released.

Share on facebookShare on LinkedIn