Book of the Month
There are arguably two broad categories of investor, each with its own appetite for conducting research, accepting risk, and navigating the complexity of financial markets.
There are those who pore through Investor?s Chronicle and the like, keeping abreast of the markets and building a portfolio of stocks and bonds in the hope of achieving superior returns. Others ? for lack of time or the inclination ? prefer a ?hands-off? approach, investing a portfolio more passively. At first glance, Edmund Shing?s The Idle Investor seems to appeal to the latter. The ?Seven Idle Investor Axioms? he outlines at the beginning of the book are little different from the investing mantras propounded by many a personal finance author over the past few decades.
He urges us to harness the power of compound interest, diversify to reduce risk and volatility, and to hold a portion of our portfolio in cash to take advantage of dips in the market. He also warns the idle investor not to follow financial markets too closely in order to remain level-headed and invested for the long-term.
Where Shing?s book distinguishes itself from its peers is in the depth of its analysis. Shing?s advice is supported by over 20 years of experience in research, trading, and portfolio management at some of the world?s most prominent financial institutions.
His expertise as a practitioner is combined with his academic background – Shing completed a doctorate in artificial intelligence before launching his career in finance. The book draws upon a wide range of academic literature, including the work of Nobel Prize winner Eugene Fama.
While Shing?s text is replete with charts and alludes to financial concepts such as the Capital Asset Pricing Model, his explanations are easily understood by the lay reader.
Shing coins his first and most basic method the ?Bone Idle Strategy,’ which is pretty much a reiteration of the classic 60/40 allocation.
The investor is instructed to put 60% of her portfolio into stocks and 40% into bonds, and to rebalance only once per year. Helpfully, he provides a number of easy-to-implement ?enhancements? to this base portfolio, much like the upgrades to processing power and storage capacity that are offered when purchasing a new computer. For example, one could increase the portfolio?s exposure to small-cap stocks, which bring greater potential for higher returns – albeit with added volatility.
The author?s ?Summer Hibernation Strategy,? however, is where he takes us into new territory. He proposes placing the entirety of the portfolio into bonds during the less-volatile summer months, then capturing stronger returns by switching the entire portfolio into stocks over the winter. The annual rotation into bonds is a new twist to the old adage of ?selling in May and going away until St. Leger?s Day.? In order to remain true to this strategy, however, the investor would need an unwavering commitment to rebalance the portfolio at the end of each season, regardless of whether she would realise a gain or a loss. The method is easily executed in theory, but would demand a good deal of discipline on part of the investor to sell in the midst of a longstanding bull market.
Shing suggests a number of specific Exchange Traded Funds (ETFs) as a starting point, providing exposure to UK mid-cap stocks, European stocks with low volatility, and US small-cap stocks. Puzzlingly, none of his portfolios call for any exposure to US large-cap stocks. These shares are typically a staple in any well-diversified investor?s portfolio, owing to the fact that the United States is the world?s largest and strongest economy. The companies that make up the S&P 500 are also some of the world?s largest publicly traded enterprises. Further, some of the ETFs proposed are ?smart beta? products which are specially constructed in an attempt to provide performance of a very specific nature, such as ?low volatility.? These may be too unfamiliar for most European investors, a large number of whom Shing admits have yet to fully embrace regular ETFs as attractive alternatives to Open Ended Investment Companies (OEICS) and unit trusts.
Unlike the ?Bone Idle? and ?Summer Hibernation? strategies, Shing opts for a more exotic name for his third and most complex proposal. Investors following the ?Multi-Asset Trending Strategy? invest in four areas: the UK, Europe, the United States, and emerging markets. In each of these regions, the investor will rotate between two ETFs ? one equity ETF, and one bond ETF. At the end of each month, the investor will check the position of each ETF?s benchmark index ? the FTSE 100 for UK equities, for example. If the FTSE 100 is above its two or three-month moving average*, then the investor will place all of the funds she allocated to the UK into the UK equity ETF. At the end of the next month, she would sell her entire position in UK equities and switch the money into the UK bond ETF if the FTSE 100 fell below its moving average.
Shing is shocked ?to realise not only how much damage can be done to your investment by just a limited number of poor weeks, but also how much of a boost is given by the best few weeks of share market performance.? Consequently, his trend following system allows the investor to ?capture the bulk of big uptrends in the share market? while avoiding ?the bulk of the downtrends.? The system he proposes is methodical, helping to remove the emotion which often clouds investors? judgement. Yet those with a smaller amount of money invested may see their trading costs mount if they have to constantly rotate between ETFs in volatile markets.
As someone naturally curious about financial markets and investing, I read The Idle Investor with interest. Shing has done an excellent job of translating bold, theoretical approaches to portfolio construction into strategies easily understood by the personal investor. The allure of the claim laid out on the book?s front cover is strong: ?how to invest 5 minutes a week to beat the professionals.? The author?s research puts forth a strong case as to how such outperformance can be achieved, though the prospect of churning a portfolio?s holdings every month may ultimately prove unpalatable to many investors. The avoidance of US large-cap equities is also a key question that is left unexplained.
Outperformance in and of itself is not the only consideration for those who want to save for retirement and sleep soundly at night. The more adventurous among us may do well to experiment with Shing?s proposals, but the genuinely idle may be better served by looking elsewhere.
*Moving average: the average level of the stock market index over a certain number of days (usually 50, 100, or 200 days).
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