A Simple Lesson From Bradley Nuttall on How to Avoid Financial Ruin

effectiveness v simplicity

At times, Bradley Nuttall has been fairly accused of being too left-brained in its presentation of investing. In this article we explore the nuances of risk-factor modelling, Nobel-prize winning investment methodologies and published academic studies.
To begin, we’d like to argue that the more an investment adviser tries to appeal to your trust using pictures of active seniors strolling on the beach, the more sceptical you should be of their advice.

number v speed

Obviously, we will be taking a different approach here.

A behaviour gap is the difference between what we know, and what we do. For example, we might know that exercise is good for us. We could look at the scores of academic journal articles that continually reinforce the links between co-morbidity, survival, and exercise. But many of us will still go home at the end of the day and sit on the couch in front of the television eating potato crisps, before heading off to bed.

That’s a behaviour gap, and investing is full of them. The core concept is that what you feel like doing is often the exact opposite of what you should be doing.

Consider this for a moment: good investing means

  1. Resisting the urge to spend, and saving instead;
  2. Resisting the urge to sell in a panic during down periods;
  3. Resisting the urge to buy euphorically during good periods;
  4. Resisting the urge to chase the hot investments that have done well recently; and
  5. Resisting the urge to believe that anyone knows more than everyone.

But why resist? For one simple reason; resisting, on average, means you’ll enjoy much higher returns and financial comforts. Though most people don’t resist, which is why many studies have shown that investors will often do much worse than investments. (For a good example see Dalbar.com)

investment return v investor return

The logic is simple: “Investments” don’t time markets, investors do.

Unfortunately, for every urge we recommend investors resist, there are numerous con-men encouraging the opposite in their glossy brochures. There’s a lot of money to be made in “junk-food,” just as there’s a lot of money to be made in “junk-advice.”

One really good way to counteract the tendency to follow this junk-advice, is education. The more investors understand about markets, and the more fully they are able to comprehend meaningful academic publications, the better off they’ll be. But the studies can be complex to understand and boring to read.

So we’ll try a different approach to education; we’ll use some very intuitive and clever sketches by Carl Richards from Behavior Gap, to educate you on how Bradley Nuttall helps investors help themselves.

The topics we will cover are:

  1. Low management fees are better than high management fees
  2. Avoid all conflict of interest
  3. Diversify your investments
  4. Understand that return is based on risk
  5. Invest when you have money and sell when you need money
  6. Rebalance to avoid buying high and selling low
  7. Invest in markets not recent winners
  8. Invest for the long-term

Low Management Fees Are Better Than High Management Fees

The less money you pay in management fees, the greater your investment returns.

Let’s demonstrate this graphically.

expense ratio v chance

Nevertheless, investors purchase expensive investment products all the time, hoping by chance that they’ve hooked on to the next big winner.

This is a bad approach to investing.

Morningstar Director of Mutual Fund Research, Russel Kinnel, observed: “In every single time period and data point tested, low-cost funds beat high-cost funds.”
(Russel Kinnel. “Fund Spy—How Fund Expense Ratios and Star Ratings Predict Success,” Morningstar, August 9, 2010)

You may be interested to know that investments recommended by Bradley Nuttall have expense ratios less than 1/3 of the average New Zealand managed fund. (Compared in New Zealand funds, using Morningstar data.)

Avoid All Conflicts of Interest

What is a conflict of interest? In wealth management, a conflict of interest occurs when your adviser/broker is paid by the investment they are encouraging you to purchase.

  • Where is the broker’s loyalty? Is it to the source of their income – the product, or to the investor sitting across the table? Remember they are a “broker,” simply paid to bring buyers and sellers together.
  • Did the broker select that product/investment because it was in the investor’s best interest, or because the product paid them handsomely to sell it?
  • Is there a no-commission and lower-fee investment that would be better for the investor, that wasn’t considered because it doesn’t bay big commissions?

Brokers get around these conflicts by selecting products which have recently performed well, on the premise that the high performance justifies the extra expense. Investors only too quickly learn the lesson that “past performance does not guarantee future performance.” In fact, more often than not those good investments go bad, as their great run was based on chance, not skill. How much would you pay for chance?

You may be interested to know that Bradley Nuttall will never accept any fee, commission, or payment, from any investment it recommends. Our total loyalty is to the client; no one and nothing else.

So look for conflicts of interest and do your research.

conflicts of interest v research

Diversify Your Investments

There’s an old proverb, which I’m sure you’ve heard, “don’t put all your eggs in one basket.” The idea being that if the basket tips over, you won’t lose your entire breakfast.

Yet many investors ignore this proverb. They invest in what’s familiar, putting more and more money into a limited range of investments that have done well for them in the past. By concentrating their portfolio in this way, they take a greater risk of losing their entire breakfast.

The principle of diversification is that in holding many investments, some are typically doing well to counteract the others that may be doing poorly. Thus your total investment experience is much smoother, as you decrease your risk while increasing your probability of reaching your financial goals.

You may be interested to know that Bradley Nuttall’s portfolios are diversified across more than 8,000 underlying investments.

However, there is an element of giving up the hope of finding the next “get rich quick” investment.


The other implication of diversification is that you never grow emotionally attached to an investment. Just because an investment has done well in the past does not mean it will continue to do so. General Motors investors learned this after 1990, and Microsoft investors after 2000. Yet millions still invest on that premise; not because it’s logical but because they are emotionally attached to the investment. This inevitably leads to mistakes.

mistakes & emotion

Understand That Return Is Based on Risk

Investing in what’s comfortable is rarely profitable. What do we mean by “comfortable?” Comfortable investments go up at a very consistent pace, with very little risk of loss. Everyone wants these investments, so the demand for them drives down the yield investors will gain.

Very simply, the higher return an investor would like in their portfolios, the greater risk (or volatility) they must be willing to accept.

Below we see a good demonstration of the volatility of different investments.


So should you own stocks (or shares), bonds, or cash? With the exception of a few investors, the ideal is to own all three, in ratios that depend on your particular risk capacity.

Bradley Nuttall has designed portfolios of investments at various risk levels to suit specific investor needs. To determine which is appropriate for you, take our Risk Capacity Survey.

Invest When You Have Money and Sell When You Need Money

All investors have to confront investing demons at some point. These demons (or emotions) tell them to flee markets after they’ve gone down and enter markets afterthey’ve gone up.

This is not a good investing strategy, yet millions of investors do it every year.

Investing by trying to forecast where the market is going is a method fraught with error. When independently measured, most market pundits actually forecast markets with less than 50% accuracy (cxoadvisory.com). If the experts have so much trouble, how accurate is the average investor likely to be?

Below we illustrate the behavior of most investors.

buy & sell

And below, we show that buy and sell decisions based on fear and greed really lead to one final result – very poor investment returns.

greed & fear

Instead, investors should invest when they have extra cash, such as a monthly contribution to their accounts or when they receive windfalls, such as from selling a business or receiving an inheritance.

Likewise, investors should only take cash out of their investments when they need it to pay for their expenses, whether ongoing or one-offs.

In doing this, investors will never invest based on a hunch about the immediate future of markets, or change investments based on similar motives – and they’ll be much better off.

Rebalance To Avoid Buying High and Selling Low

Rebalancing is a strategy where an investor targets a certain level of risk (and commensurate return) in their portfolio. When markets have been going well (and risky assets in their portfolio have increased), they sell back. When markets have been doing poorly (and risky assets in their portfolio have decreased), they buy more.

In other words, by rebalancing, investors force themselves to buy assets when they have fallen (are low) and sell assets when they’ve risen (are high). Simultaneously, they have much greater control over the maximum loss and expected returns they receive in their portfolio.

Determining an appropriate risk exposure and rebalancing regularly means that investors do the exact opposite of the “dumb” behaviour, outlined below.

buying high buying low

Note that Bradley Nuttall rebalances our clients’ portfolios regularly; maybe that makes us “smart!”

Invest in Markets, Not in Recent Winners

Almost all beginning investors come to an early conclusion: “I don’t know why this investing thing is so complicated, I should just find the best performing fund/manager/broker/investment over the past several years and invest with them.”

This is a flawed strategy.

Investments that have done well in one period are often the worst performers in the next period. Many studies have been done to determine whether or not a manager’s recent performance is a good guide to selecting an investment. (For example, read Laurent Barras, Olivier Scaillet, and Russ Wermers study “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas.” It investigates the presence of true alpha in the results of 2,076 open-end US equity mutual funds for the thirty-two years from January 1975 to December 2006. They find that 99.4% of fund managers have no skill, and also note they can’t eliminate the possibility that none have any skill.)

Conclusion: trying to invest based on recent performance is a fools errand.

Manager performance simply does not endure. The evidence suggests that managers mostly do well as a result of dumb luck. For example, someone could toss a coin and flip heads, five times in a row. Does that mean you’d give them greater than 50% odds of flipping heads again? I hope not.

The fact is, investing based on past performance causes a lot of accidents.

perforamnce v accidents

You may be interested to know that Bradley Nuttall never selects investments based on the recent performance of investment managers. Instead, we look at the risk exposure of investments and invest in those that allocate that exposure most intelligently, according to academic findings.

Invest For the Long-Term

All of us live in the present where we hear the “news,” which is inevitably short-term in nature – what has happened today and what is likely to happen over the next few days. Thus, it is difficult in the present to invest for the long-term. A long-term investor basically ignores the short-term market movements, whether good or bad, and stays focused on fundamentals:

  1. When do I need to spend my investments?
  2. What rate of return do I require?
  3. What risks/losses am I willing to bear over short time periods?

This long-term focus almost inevitably leads to better results than short-term thinking. As we see below, slow and steady investments over the long-term lead to better results than chasing short-term news and ‘hot’ investments.

slow & steady

In other words, investors must forego striving for instant gratification in their investments. Making quick decisions that “feel” right, almost always lead to mistakes that “feel” horrible later.

instant gratification

At Bradley Nuttall, we only invest for the long-term. We know that we cannot control the future but over long periods of time, markets reward risk-taking. Thus, we can look past the short-term to guide our clients toward a comfortable future.

We hope that these sketches have illustrated how Bradley Nuttall help clients avoid financial ruin. More than that, we are the steady hand that allows clients to actually receive the returns of investments, at a level of risk appropriate for their circumstances. In short, we help our clients achieve their long-term goals and dreams.