Investment Philosophy

The investment philosophy developed by Oak Barn Financial Planning is based on the science of capital markets. Like all good science this is an evidence based philosophy and formulated from research carried out by some of the greatest financial academics in the world, a number of whom have gone on to receive Nobel prizes for their work. Evidence in the scientific context has to be repeatable to confirm the theory, and we therefore have a very high degree of scepticism of fund management processes that prove not to be repeatable and rely mostly on luck.

The key elements of the philosophy are:

Investment Philosophy

Markets are efficient – a share price reflects what is known about a company at any moment in time. Such knowledge is limited to what has happened in the past and what may happen in the future is purely speculation. Evidence suggests that trying to successfully time investment markets is a largely pointless exercise and reliant mainly on luck. Hear the view of a Nobel Prize winner on this subject here.

Diversification reduces risk is the discovery that won Harry Markowitz the Nobel Prize in Economics in 1990. Diversifying investment portfolios using different asset classes can reduce the level of risk and help to maximise investment return.

The Three Factor Model is used to enhance returns over the longer term. In the early 1990s, research carried out by Eugene Fama and Kenneth French showed that in the medium to long term, the following three factors explain more than 96% of the portfolio’s return:

  • Returns from shares are expected to be higher than from Fixed Income
  • Small company shares (measured by their market capitalisation) have a higher expected return than large company shares
  • Lower priced, out of favour, value shares have a higher expected return than higher priced growth shares (measured by the ratio of a company’s book value to its market value)

Active versus Passive fund management – On average, actively managed investments underperform the market by a wider margin than passive investments. At Oak Barn Financial Planning we use index-tracker funds and other more advanced passive strategies as they are more likely to capture the market rate of return, as well as benefiting the investor by having considerably lower costs.

Market timing – Evidence shows that no one can consistently predict market performance, and getting it wrong can be very costly. By remaining fully invested over the long term will greatly increase the chances of capturing capital market returns.

Portfolio rebalancing is an important discipline to realign a portfolio when a stronger or weaker performing asset class has exceeded or become underweight from its original allocation. Evidence shows this is best completed on a regular basis.

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