S2E1: The one thing you should invest in (to beat 95% of professional investors) | Ramin Nakisa
Everyone talks about diversification, but how diverse do you really need to be? Can you just invest in one fund? Ramin Nakisa is personal finance YouTube royalty in the UK. He’s one of the OGs who showed Damo that it can be done. But he’s also a ridiculously smart, former investment banker who left that world to teach ordinary people how to build wealth because, like us, he thinks there’s a ridiculous financial education hole. In this episode Ramin walks us through some of the major assets classes, their pros and cons - but also why one investment might just be enough for you, forever.
What you should remember from this episode
Ramin doesn’t want to invest in handpicked stocks - despite having been an investment banker. He would rather bet on a global index fund, and he thinks this comes down to modesty, or knowing your limits - plus knowing the statistics.
Ramin says that over a 10-year period fund, only about 5% of professional investors beat the market. Are you likely to do better than the 95% of professionals who are highly intelligent, dedicated and have massive resources - but still don’t beat the market?
Instead, he suggests just ‘riding equity markets up’ - the idea that because the stock market rises over the long term (it has always done historically) then you should capitalise on this trend by investing in the market through, say, a global index fund and doing it for a long time.
Ramin explains that it’s not even discussed that most professional investors won’t beat the market over the long term. He describes this as the ‘cult of alpha’. Alpha means beating the market (beta is just tracking it).
People assume you should pay a professional to invest on your behalf (even more so in Europe than the US), but the reality is that you can generally do it cheaper, simpler and with better performance yourself (by buying a global index fund) than most professional investors over a 10-year period. It seems counter intuitive but it’s true.
It’s good to understand all the moving parts of your portfolio which is one of the reasons simplicity is valuable. When you complicate things, it makes your portfolio more breakable - and according to Ramin, what breaks it is your behaviour, e.g. selling when times are tough.
You can buy thousands of stocks around the world with one fund and get exposure to loads of bonds through one bond fund, so you can be diversified across stocks and bonds really simply - through just two funds.
Remember, when you invest in multiple things, you’ve got to manage them - rebalancing them, for instance, when you get too exposed to one investment.
Apart from some fun money and experiments, Ramin generally invests in just one global index fund - and he’s got it all in one platform. He’s not worried about losing everything if the platform goes bust because he’s reassured by regulators here in the UK. Check out our FSCS episode if you want more information on this.
A bond is one way for governments to raise money apart from taxes (check our Bank of England episode) - and for you to get paid a predictable interest rate, or coupon. You might buy a bond for £1,000 that pays 5% over 10 years. This means you will get 5% a year for 10 years (£50) and then after 10 years you’ll get your £1,000 back, having been paid 5% a year in the meantime. You can also sell your bond in the meantime but the price of the bond isn’t fixed (it’s not always £1,000) - the price depends on the market (we won’t go into this more here) - or you can wait for 10 years and get your £1,000 back. Bonds can be very low risk if your bond is from a reputable, credit-worthy government, for instance.
When interest rates are increasing, short term bonds are attractive because you can buy bonds, let them reach maturity quickly, and buy new ones that are offering higher interest rates. But, when rates are falling, the general wisdom is to lock in longer term bonds that are paying a higher yield today than the ones you might buy in X years’ time once interest rates fall.
Although bonds are much more controlled than stocks, they can be complicated to understand so we’re not going into too much detail here. We may do an episode on them one day - hit reply if you’d like us to do that soon.
According to Ramin, gold can ‘pass the crash test’, meaning it can help your portfolio when stocks crash because people often move their money into gold during these crises - but gold also introduces crashes into your portfolio because gold itself can crash.
REITs, or real estate investment trusts, are a way for you to invest in property.
What you should do after this episode
Consider the simplest portfolio that can achieve your objectives:
To do that, consider your goals and time horizon. For instance, if you have a short-term goal like paying for a wedding in the next 5 years then the stock market is probably too risky/volatile for you - a cash ISA might be better, or even a bond which matures in that time.
For long-term investing, one global equity fund might be enough for you (it is for Ramin).
If you want to hedge, or de-risk your portfolio by diversifying into multiple investments, look at how the two investments performed during crashes - did they both crash? People often make the mistake of investing in two things without realising they offer them a similar exposure to risk (they both generally crash at the same time).
If you’re young, diversifying your investments to lower the risk of your portfolio doesn’t matter as much as when you’re older because you can ride out the volatility.
But as you approach retirement, you might want to de-risk from investing in just stocks by, say, buying some bonds.
Check out portfoliocharts.com to see how different investing strategies would’ve performed historically.
Next episode - Deborah Meaden: the questions you have to ask yourself about money
The Dragon explains how you should think about money, what she looks for in a business and how to teach kids about it so you can equip them to achieve their dreams.
