Activity Based Investing and Cost Based Investing

By Jason Fittler

Have you been told by a financial planner, investment adviser or stockbroker that you can expect to receive an average return of 8% per annum? 

When we take a long term result and average it out over the number of years we come up with a Cost based investing return, or the average. Although this is useful in estimating return it really has little to no bearing on what your actual return will be.

Cost base investing seems logical and easy to understand; however, when you have down turns in the market this method of estimating your returns comes unstuck.

Activity based investing is a better measure of performance and will over the longer term produce a better overall result. Activity based investing only calculate returns for year to year, there is no long term average return only real returns. Take a look at the below graph of the return in the All Ords over the past 30 years.

 

This is not a smooth line showing regular increase in your portfolio. As you can see some years have had good returns others no so good.

A cost base investor would have continued to hold their investments during these ups and down looking for that average return. An activity based investor would have changed there investment style to suit the market, selling down their investments into cash when the market was producing an above average return and buying back in when the market under performed.

The activity based investor will always produce a far better result.
Keeping in mind that both investors have the same fundamental belief that the market over the long term will go up.

I will have more information out on activity based investing in the near future.

PS. If you would like to learn more RIGHT NOW... give me a call on 07 4771 4577.