Markets Work
Monday 14 May 2007
Everyone is a participant in a capital market of some kind. Research has shown that no
matter where you are in the world, market participants will direct their capital and work
skills to areas where they expect to achieve the greatest financial benefit.
To illustrate this point, imagine if you were offered the same model of car from a dealer
selling at £60,000, or a dealer selling at £50,000. If you had the information about the car being sold at the lower price, you would surely buy it instead of the more expensive one. This is precisely how capital markets work.
Given the massive competition surrounding supply and demand in capital markets worldwide, asset prices tend to fall quickly to ‘fair value’, which ensures that no one investor can expect greater returns without bearing a higher degree of risk. In fact, markets work so well in pricing assets, studies have shown that up to 94% of the variability of portfolio returns over long term periods is simply the ‘market’ return (i.e. solely due to being invested in a particular asset class).
The potential for individual investors or even professional investment managers to add significant value to a client’s portfolio (by striving to take advantage of pricing ‘mistakes’ in the market and attempting to predict the future) is therefore limited, yet the cost of pursuing this investment approach is relatively high.
We believe that rather than trying to predict the market (or paying a premium for others to attempt it), investors should just let the market work for them. The capital market rate of return is available to every investor, at a reasonable cost, and making unnecessary changes to a portfolio in an attempt to predict the future can prove costly and futile.
Categories: Asset Class Management, Research, Risk
posted by Murray Round Wealth Management @ 19:25,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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