The Right Way To Invest:

Keys to a successful investing experience

Successful investing for an individual is not about maximising returns or even maximising risk-adjusted returns (returns in return for the risk undertaken). It is about getting the best probability of meeting your financial goals so that you can achieve your life goals. With a little guesswork and as little stress as possible.

There are four keys to successful investing:

  1. Focus on asset allocation – do not take country, sector or firm-specific risks
  2. Go for market-based return – it is hard to consistently beat the markets through active management
  3. Keep costs low – the difference compounds big time, over time
  4. Stay invested for the long term – time in the market, not time the market!

Keys To Successful Investment

Focus on Asset Allocation – Do not take country, sector or firm-specific risks

The most important thing to get right is asset allocation – how much equities you have versus bonds in your portfolio.

Asset allocation accounts for 90% of the variability of a portfolio’s return, while active investment decisions such as market timing and security selection play minor roles. This is the conclusion of a 1986 seminal study by Brinson, Hood, Beebower, 1986 which is widely accepted in the finance world.

The stock market goes up in the long term because of the enduring growth in global demand. However, this may not be true of individual regions, countries/markets, sectors or companies. Given the randomness in returns from year to year among countries/markets and sectors, why not have the whole market by diversifying your investments across the whole asset class?

Equity Returns of Developed Markets


The Randomness of Returns: Sectors

Nevertheless, many fund managers still practise “active management” – to select countries/markets, sectors, or individual shares or bonds, based on macroeconomic, fundamental or technical analysis. 

If asset allocation is the most important, then there is no need to do this unless active management can consistently beat the markets. However, the track record of success of active management is not too good, as we see in the next section.

Go for Market-based Return – It is hard to consistently beat the markets through active management (and please do not pay extra fees for it)

There are three major methods of investing. Active, passive and a kind of in-between called “evidence-based”.

Active investing tries to deliver more than the market return, by doing one or more of the following:

  • Changing asset allocation (the split between equities and bonds) dynamically or tactically, usually based on macro or market forecasts
  • Selecting countries, sectors based on forecasts
  • Selecting individual companies’ securities (stock picking, bond selection)

Passive investing and evidence-based investing go for the market-based return. The difference is that passive mimics the broad market (as represented by an index) and evidence-based investing tilts heavier weights to securities that are exposed to certain dimensions or factors to get a higher return but without forecasting or individual securities analysis.

Different Fund Managers’ Approaches to Investing in Global Equities

Most managers cannot beat the markets whether in the short or long term. The percentage of active managers that beat the markets is a minority and grows even smaller in the long term. The underperformance of active managers is observed in both developed markets and emerging markets.

Active Managers versus Market – U.S.


Active Managers versus Market – Emerging Markets

Even if you could find that rare active fund manager in the minority group, over time it is not the same manager that will stay an outperformer.

Active Fund Performance Persistence

A large part of active management is about market timing – when to get into which asset class, market sector or stock –based on forecasts. Often, even valuation of individual stocks is based on forecasts of future earnings (e.g. the “earnings” in a price-to-earnings ratio is often a forward forecast). However, in reality, it is very hard to get forecasts right in any one year.

This is not surprising as markets are efficient – a hypothesis put out by Nobel laureate Eugene Fama (whose work underlies Dimensional’s strategies) that says, among other things, that current prices incorporate all available information and expectations and are the best approximation of intrinsic value. Instead of competing against the collective knowledge of all investors, let the market and its wisdom work for you.

Keep Costs Low – The difference compounds big time, over time

Costs eat into your return, with the impact compounding very significantly. Costs are one of the only things that investors know and can make a choice about prior to investing.

Actively-managed funds have higher Total Expense Ratios (TER), partly to compensate for the effort in active management. In other words, there is often a double whammy with active management. Return is reduced first by underperformance and then by the high fees, compounded over time.

Another reason the Total Expense Ratio of active funds in Singapore is high is that they have to pay distributors like financial advisers. About half of this TER is paid to advisers as trailer commissions. Passive and evidence-based funds have fees that are 75% or even lower than active funds. They typically do not pay trailer commissions to advisers.

Other costs that investors may have to bear are upfront sales charges to advisers (MoneyOwl does not charge an upfront sales charge), an annual advisory/wrap fee and custodian/platform fees paid to a third party.

All in, the difference can add up to almost 3.9% in year 1 (with a sales charge) and 1.9% every year.

For an Equity Portfolio:

All-In Fees/Charges Comparison

One-off Charge
Sales Charge
2.00% 0.00% 2.00%
Annual Charges
Advisory/ Wrap Fee
1.00% 0.50% to 0.60% 0.40% to 0.50%
Custodian/ Platform Fee
0.22% 0.00% (waived) 0.22%
Fund Total Expense Ratio (TER)
0.27% 1.62%
First Year Charges
0.77% to 0.87%
4.24% to 4.34%
Ongoing Annual Charges
0.77% to 0.87%
2.24% to 2.34%
*Average TER of an actively-managed equity fund

In 20 years’ time, investing with a low all-in fee can give you 50% more return. In 30 years’ time, you can get 83% more and in 40 years, the difference is more than double once over.

Stay Invested for the Long Term – Time in market, not time the market!

Staying invested to capture long-term market return is key to a successful investing experience. Stock markets go up in the long term. This is what the evidence tells us. The condition is you must have a long enough time.

How long is long? You should have at least 10 years for equities, to minimise the risk of losing capital.

This is not a magic formula and there are still risks involved in investing. But empirically, consider the S&P500, the US stock market, which is a big component of global market indices:

If you had at least 15 years to not take out your money, it did not matter which year from 1928 onwards that you started investing: you would not have had a negative annualised return. In other words, despite the hell and high water of the Great Depression, bubble and the Global Financial Crisis markets recovered and you would not have lost money. If you excluded these events, the time frame for no negative annualised returns is shortened to 8 years.

Many of us have this time horizon. Contrary to common wisdom, even retirees in their 50s or 60s should have at least some equities in their portfolio, as part of their spending will only be much later on, given life expectancies nowadays of 85 years or longer.

The key to staying invested is to be able to ride through the fluctuations. It is like you are on a huge roller-coaster and you are frightened even though you are well-strapped in and understand the physics of centrifugal force. Thankfully, there is no “stop” button on the roller coaster for you to press, otherwise, you might very well fall out and die. Investors, however, can and have reacted to market events. This can seriously hurt your return, as missing even only a few days of strong returns can drastically impact overall performance.

Reacting Can Hurt Performance

This is because, even though we understand that stock markets will recover and go up in the long term, the emotions can be difficult. The heart and head do not connect when markets are plunging.

If you are really unable to take the volatility, or if your time frame is shorter, adding bonds to the portfolio will help to safeguard the odds of a positive return, albeit at lower return rates. In times of market stress, high-quality bonds from government and corporates of good credit standing can move in the opposite direction and stabilise portfolio return.

Once you are invested, your financial adviser should help you to understand, remind and risk-coach you about volatility and long-term returns, to help you stay invested. That is why MoneyOwl is not a robo-advisor, but a Bionic Financial Adviser, with human advisers who understand human emotion and apply human wisdom.