It’s true: there’s a lot to be said for index funds.
The funds, which aim to match their respective designated market index, are accessible for most investors, often have low fees, can be included in a Stocks and Shares ISA, and offer a simple solution to diversity and asset allocation.
I’ve written about this type of passive investing in the past, as have many others, and consequently, they are growing in popularity.
Part of the argument for index funds is that the average investor will find it very difficult to beat the market. In fact, in 2008, the legendary investor, Warren Buffett, held a bet that an index fund would beat a professionally managed active fund over ten years. He won.
So, if professionals can’t beat the index, how can we?
Under pressure
As individual investors, I think we have one strategic advantage over active fund managers.
We only have one client to please: ourselves.
You’re not going to have a manager poring over your transactions, knowing that at the end of the year, you might lose your job if you haven’t beaten the market by 3%, are you?
I think this allows us breathing room to make considered, risk-averse decisions. If you’re not sure about a company’s stock, you don’t have to buy it. You can wait until something more appealing comes along. There is no pressure.
Buy the index, but not the losers
I’ve heard this said several times.
I like the simplicity of the saying. If we were to buy every constituent in the FTSE 100, for example, except a handful of the future worst-performing stocks, we would have beaten the market.
While I agree in some part, it does make things seem a lot easier than they are. Firstly, how do we predict what the worst-performing stocks will be? Sometimes as investors, we can spot what we think is a bad apple a mile off. But it might be bruised rather than rotten, and given time, could turn good.
It can also work the other way round. A company with a strong balance sheet hits some trouble and the share price gets battered.
Hold it
A few years ago, my colleague, Paul Summers, wrote an article about a study carried out by Fidelity.
From an analysis of accounts between 2003 to 2013, it discovered that its best-performing investors were those that never touched their money.
Did they have nerves of steel?
Nope.
Now, although I might go to some extremes to get a good return on investment, this is mentioned merely as an illustration that holding your position in the market for the long-term is often a good strategy.
Turn off the noise
We have so much information at our fingertips now. On our mobile phone we might have a stock market app, our ISA account and live share prices.
A stock price will have good days and bad days. It’s important to remember why you bought it in the first place and what your investing principles are.
It might not be easy, but I think it’s an entirely achievable goal for an investor to beat the market.
