Don't Worry About Beating the Market
Individual investors can march to the beat of their own drum, giving them a significant advantage over professionals.
It is a simple question and goes to the heart of any investor's journey. My answer is, do you want to beat the market? The benchmark indices were set up so you can measure your performance against a bunch of stocks and compare your performance with your peers. So who are your peers, and does beating them really matter? Fund managers love benchmarks, as it gives them the best marketing tool: beat the index, and you get to market the heck out of your fund. It is what the benchmarks were designed for. You get your own wiggly line of performance above the market wiggly line, and off to market you go. It is not rocket science. Magellan was brilliant at it.
Here's my opinion on beating the market: it's rubbish. What is the point in outperforming the market if the market is going down? Your aim is not to beat the market, but to deliver an absolute performance. Your mission, if you choose to accept it, is not to beat the market but to make money. The idea is to create wealth, not lose less money than the index. The index, after all, does not always go up.
When you are retired, try paying your bills and living life with the 'outperformance'. If the index has been going down for the last five years, and your portfolio hasn't gone down as much…well, good luck.
Forget beating the benchmark. That may not get you there if the market is rubbish. Of course, the investment boffins will tell you that the index always goes up over time. You just have to pick that time! Instead of trying to beat the benchmark, you would be much better served by setting a target that your investment pie needs to reach over time, to allow you to enjoy the lifestyle (hate that word) that you desire. Absolute returns should be your goal. Benchmark returns are for funds that want to market their genius. Your goal should be that self-imposed target of growing your pie.
One thing I know for sure is that investing is tough. There are no easy answers. Professional (?) fund managers find it tough. They have huge resources and a massive advantage over retail investors, and yet, they still fail. I sometimes find it worrying that so much effort has gone into so little improvement over an index ETF - especially if the benchmark is your thing. It will not guarantee that lifestyle you desire though. There are no guarantees with investing. Past performance is not indicative of future results. You only have to look at many fund managers' performance to see that - even Cathie Wood has the odd bad year.
For retail investors, what you do have is flexibility and choice. Big funds cannot move that quickly. They think that a 5% cash holding is being defensive, but you could go to 100% cash. You do not move markets when you buy and sell. Stealth. It means that you have that flexibility. Use it. But use it wisely, as with any great power comes great responsibility. Tax is one issue and selling winners rather than losers is another.
Want to Gain an Edge?
How do you gain an edge to make absolute returns? The simple answer to gaining an edge is to use inside trading. Isn't that illegal? Of course, it is. And we do not want to go to the 'big house'. But when I talk inside trading, my definition is different. Inside trading, in my eyes, is using every piece of available information to try to gain an advantage. We all try to game an advantage after all. But how? Insider Trading means watching what directors are doing in their stocks. It means watching what the funds are doing. It means opening your eyes when you are walking around. Trying to derive clues as to the investment picture from everyday experiences. Read as much stuff as you can. Try to connect the dots. Use every weapon in your investment arsenal. Do not just rely on Technical Analysis alone. Don't rely on Fundamental Analysis completely. Do not swallow broker research whole. Being strapped to one method of investing limits you. Take a holistic approach. Look at what is happening around you. What products do you use and what do others use?
The Franking Edge
When you look at the Australian market it is dominated by big resources and banks, big opportunities abound every day. We are also blessed with dividend imputation which makes us fairly unique in the world. As we approach the banking sector results and those fat franked dividends, use that to build wealth. Asset allocation and portfolio construction make a huge difference. Timing the market is tough. Sometimes being too cute is sub optimal. If you do not have the time or the inclination, and index performance is good enough for you, an Index ETF is the way to go. A200 or IOZ have the lowest fees. But if you really want to build wealth, then absolute performance should be your goal. Treat it like a job. Get serious about it. Making money requires effort. Making anything requires effort. Buying a charting program and having it spit out stocks to buy or sell is not the best solution. You need to embrace all the tools you can.
Here at Marcus Today, we know of one member that has turned $150,000 into $50m in the space of a few years. All his own doing. Try doing that in an Index fund. That beats an ETF. How did he do it? Lots of research and belief in the project. Bit of luck too, no doubt. Always helps. But the more work you put in the luckier you will become.
Author: Henry Jennings, Senior Market Analyst
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