Bloomsbury Financial Planning

Smart ideas about wealth

Investment philosophy

Our beliefs

Capital markets work, are efficient and, for investment purposes, assets are fairly priced.

Security prices are determined according to all freely available information and by fierce competition among market professionals. As such, we believe it is virtually impossible for any single investor to consistently earn more profits than other investors by choosing securities that are undervalued. In other words, market forces create an environment where picking individual stocks does not guarantee superior performance.

Risk and return are related and priced risk factors determine expected return, which is a rational reward for systematic risk.

Modern Portfolio Theory (MPT) was developed at the University of Chicago by Harry Markowitz and Merton Miller, and later expanded on by Stanford professor, William Sharpe. Each of these professors later won the Nobel Prize in Economics for their contribution to investment methodology.

Unlike traditional asset management, which focuses on predicting individual stock price movements, MPT looks at the portfolio of assets based on the combination of its risk and return components. According to the principles of MPT, there is an optimum combination of investments that will bring the highest rate of return for every level of risk.

Diversification is essential and is the antidote to uncertainty.

Concentrated investments add risk with no additional expected return. Investors can reduce their potential for loss by investing in a basket of different securities. In less technical terms, diversification means the same thing as the adage, "Don't put all your eggs in one basket." It is important to note that a diversified portfolio is not necessarily a properly allocated portfolio.

Structure explains performance - asset allocation principally determines results in a diversified portfolio.

Academic research has provided evidence that an investor's asset allocation decision - the choice of asset classes and the portfolio percentage allocated to each - is the single most important element in a portfolio strategy. It accounts for 94% of a portfolio's performance compared with 2% for market timing decisions and 4% for security selection. Asset allocation involves diversifying among several asset groups to improve total return whilst reducing risk.

Index funds provide the best way to gain exposure to asset classes

Index funds allow one to gain exposure to different asset classes at much lower cost than actively managed funds. In addition, such funds avoid the additional risk of market timing or style drift which is inherent in funds which are actively managed. Study after study shows that when active funds do outperform benchmark indices, this is down to luck rather than skill and no more than would be expected by random chance. It just doesn’t make sense to pay so much more for random chance.