Pensionfriend's Investment Advisory Philosophy

Learn about our fundamental investment advisory philosophy that forms the basis of our investment advice and recommendations.
Published on Oct 26, 2022
Pensionfriend's Investment Advisory Philosophy

Written by Dr. Christian Mulder

Published on

Investing is a lot about trust in the expertise and also honesty of the specialist that advises you. In the following, we explain our fundamental investment advisory philosophy – in other words, the principles we follow and which form the basis of our advice and recommendations.

Not the standard warning

The standard warning for investors is: past returns are no guarantee for the future.

But a better warning should read: Biased presentations of returns are a guarantee that you won't see such returns in the future! That is why we seek to provide you with unbiased analysis and data on returns.*

* Inspired by Stephen Nickell, Nobel Laureate and one of our teachers.

1. Cost is a dominant factor

Cost is a dominant factor for a long-run investment. Most people underestimate the impact of cost on their long-term returns. Therefore,

  • at Pensionfriend we identify and emphasize low(est) cost products

  • We are strongly skeptical of the outperformance promised by high cost funds. Many fund managers cherry-pick the data they show you so it seems they outperform and this then justifies their high fees. 

  • Fortunately, we nowadays have very low-cost ETFs.

  • At Pensionfriend we review closely how ETFs track the benchmark they seek to replicate. This Tracking Difference includes the cost of the ETF. It can be a source of additional performance or unseen cost.

2. Taxes are overrated and often incorrectly interpreted, especially in Germany

  • At Pensionfriend we quantify the impact of taxes and subsidies, so that they can be measured.

  • Taxes on pensions in Germany are especially complex. This is why we have made calculators that track the net pension benefits that you can get for net contributions. 

3. Choosing your asset classes and their allocation is the most critical factor for long-term return

80-90% of the expected return comes from this broad benchmark or Strategic Asset Allocation choice (SAA). Traditionally the main choice for the SAA is the allocation to stocks and bonds. The thinking used to be that bonds provide safety, but this has shifted dramatically as interest rates on bonds are so low.  

  • In the current environment, stocks are safer than bonds over the long term. Bonds are subject to inflation risk. When returns are so low investing in bonds will result in a decline in purchasing power. Stocks on the other hand provide inflation protection over the long run, as they give you a stake in the nominal economy. Stocks, therefore, provide over the long term both inflation protection and give you a stake in real growth. It is critical to hold stocks for a long enough period. 

  • While stocks are advisable there are still exceptions, based on the risk preferences of the client.

    • Bonds can be advisable as part of the portfolio of a new inexperienced investor, to limit potential drawdowns, till adequate learnings are made. 

    • Bonds can be advisable in retirement or even before if risks need to be limited to reflect limited resources, or a reduced tolerance for risk when the client no longer has the option to work to offset a pension shortfall.


4. The next most important decision is the choice of a specific benchmark for any stocks or bonds

I.e. which indices for stocks and bonds to track and mimic with ETFs? Is it Stoxx50, the DAX, the S&P500, the MSCI world index etc. Few people are aware of the differences in performances in these indices, the origin of these differences, whether returns are sustainable, and whether and how they can rely on historical performance more generally. 

  • At Pensionfriend we use the longest (over 150 years) data series available to estimate returns and avoid data bias, i.e. the misleading use of data by cherry-picking the period of performance you show or rely on.

  • If only shorter periods are available (most indices have been around for only 20-50 years) we compare them against benchmarks for which longer data sets are available. We avoid the meaningless focus on the returns of the last 3 or 5 years. Using such short data is open to manipulation.

  • At Pensionfriend we are very well aware that extreme performances are not sustainable – companies or sectors would take over the whole economy.

  • At Pensionfriend we check if the outperformance of indices is in line with fundamental economic principles: For example:

    • ETF managers that have smart strategies to replicate the benchmark or earn extra fees, for example, through securities lending. It can make a small but reliable difference.

    • Asset classes that economically can be expected to have higher short-term volatility and hence lower prices and higher returns, but make sense for long-run investors that should care less about short-term volatility

    • Asset environments (countries, continents) that are favorable (economically and politically) for long-term growth and those are not. 

5. The third key choice is that of currency

Choosing the right currency is far more important than most people realize. It can impact the investment return by 2-3% annually. Very few investment advisors have any expertise in the topic, and take the lazy approach of accommodating the clients gut-sense. At Pensionfriend we know currencies – after a lifetime at the IMF and trading currencies as a hobby: hedging from the dollar to the Euro can be very costly and over the long turn counterproductive. 

From a risk perspective:

  • Assets held in another country function as a risk diversification to the income of the job in the home country. Diversification, therefore, argues against hedging In the build-up phase of your pension. 

  • In retirement, income certainty becomes more important, especially when retirement assets are limited. Hedging then can be considered for part or all of the assets. 

6. Rebalancing the portfolio is often tedious and neglected, while important

  • Market movements will change the portfolio composition. Rebalancing rules or algorithms keep the composition within a certain range and minimize the cost of changing the portfolio. They also simplify the regular decision of where to put additional money or from which source to take the money.

  • Well-tested algorithms can not only reduce cost but also add a small extra return. At Pensionfriend we help our clients automatically rebalance their portfolios to benefit from this. 

7. Stock & Sector specific picking and active management is generally very risky

The risk of individual stocks or even a sector is very high. By jumping from one boat to another, clients can end up missing both.

  • Buying a wide index is the best way to diversify. This is why we focus on very low-cost ETFs of wide indices, like the S&P 500 or the MSCI world index, and seek to diversify and outperform vis-a-vis them.  We do offer sector indices but do not recommend them.

  • Active management is likewise not recommended. Market timing is by far the most difficult of investment decisions, and mostly does not work while taking a lot of energy.¹

  • Exceptions are clients that have a solid and explicit record of outperformance, i.e. they track themselves against a benchmark, and are aware of the risks.²

  • Outperformance by Fund managers is relatively rare. The reason is that those who can outperform also command very high salaries and thereby eat up a lot if not most of the outperformance. In the end, investment is what economists call a zero-sum game. For anyone outperforming there are those who underperform, and that is ignoring cost. Most asset managers that claim outperformance do window dressing. They show only the funds that have survived or show time periods over which they perform well.

8. Risk is confusing to many but it can be really understood well by considering a few factors

  • At Pensionfriend we distinguish a fundamental preference for stability versus return versus the ability to take risks. A civil servant may not like risk but can take it very well. While an entrepreneur may like risk, but should not take it with his retirement money. Income stability, income outlook, and other financial cushions (existing pensions, houses, etc.) are objective factors that impact the ability to take risks.

  • Tolerance for drawdown, i.e. losing money vis a vis balances invested is a key measure to understand clients ability to emotionally handle risk. It is a hard constraint. Help clients to identify where their sense of risk comes from. Is it the novelty of investment, lack of understanding or just a strong adversity to a lack of stability? 

9. Discipline is key

  • At Pensionfriend, we recommend that our clients stick to the strategic asset allocation that is appropriate for them, and keep their eye on the long-term objectives. 

  • Our selection algorithms do advice adjustments based on fundamental factors (such as changing age or income, retirement, and reflecting fundamental risk preferences). Economic and finance theory suggests that nearly all information is reflected in the current prices. The big investment firms, the high-paid traders, and hedge funds, have the insights and expertise to do arbitrage. Even large pension funds don't have it and just stick to their asset allocation strategy. 

  • Some clients may have special insights through their jobs or cultural awareness, but for pension savings awareness of the risk of active management is very important. 

10. Be very wary of products that force clients into an annuity

An annuity is a guaranteed fixed (minimum) payment for life, that is usually paid monthly. There are many products that force clients to choose an annuity in retirement (like Riester or Rurup). Many other products including Pensionfriend's Private Pension Plan, allow clients to choose an annuity. So guidance on the choice is important. 

  • The client needs to be able to make the annuity decision based on circumstances prevailing later in life and not be forced into a decision he/she cannot as yet oversee. 

  • This is especially important as annuities are very costly and non-transparent in Germany and their attractiveness depends in large measure on the level of interest rates. 

  • Insurance companies need to keep large reserves in case people live much longer than expected, and thus don't pay out much of their money until late in retirement and if they indeed have survived. Insurance companies are especially wary of the risk of longevity as annuities are bought mostly by people that live especially long. This problem is compounded by the fact that annuities are not well invested by insurance companies as they need to guarantee the payout. Therefore they are mostly invested in bonds that have low but certain returns. 

  • Clients should avoid these products early in retirement unless they know they will grow seriously old or do not have a cushion to take risks. Typically investing in a bond ETF then is a better choice still.

  • If clients have to choose an annuity they are advised to do it late in life, if they run out of their risk cushion, so as to let their assets work for them until then.

  • At that time clients should scout for the best yield. Also for tax reasons, we at Pensionfriend, therefore, favor lump sum exit options as clients can then determine at the time whether an annuity is attractive.

In conclusion:  We encourage clients to invest in a disciplined way for the long run in low-cost well spread indices that, as measured objectively (using the longest data), perform well, and that stand up to the scrutiny of financial and economic insights to ensure that the past track record is expected to translate into future (out)performance.  Managing money by clients themselves is strongly discouraged, as many studies show this leads to underinvestment and severe underperformance. Likewise, we discourage investment in funds that do active management or funds or intermediaries that charge high fees. 

Especially when interest rates are low you want to avoid annuities and certainly products that force you into annuities as the underlying system makes them really unattractive.

¹This article analyzes two well-known glaring anomalies in investment management; "(1) after fees, active portfolio managers do worse than market indices, and (2) clients continue to pay for services they don’t receive.Eben Otuteye & Mohammad Siddiquee, 2020. "Underperformance of Actively Managed Portfolios: Some Behavioral Insights," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 21(3), pages 284-300, July.

² This article contains a very good overview of the literature, notably when individuals underperform the market.