Demoralizing Realization that I can't beat an Index Fund

[Leftfield]

Managed Funds aren't for me.

Indeed, I hold the view that if I spend roughly the same time each week managing my wealth as we do managing my health (say via exercise), then there are huge benefits for me and my family, both in both financial returns and knowledge.

For 8 yrs I invested in index funds and Kiwi Saver while employed. Aside from the employment benefits and contributions I achieved 8 to 15% pa over that time.

Upon retirement and over the last 4 years I have managed my own share market investments, sticking to NZX companies, and my annual returns have averaged well above those of managed funds or NZX top 50. If I told you my actual returns I doubt I would be believed, but suffice it to say my investments are currently growing each year at a level higher than my old annual salary.

I've tended to avoid dividend yield stocks (as I've found them rather over-priced in terms of risk/reward.) I've avoided IPO's and concentrated on capital growth companies (long term tax free capital gain is my goal) with investments in companies such as XRO, ATM, PPH, SKO, and THL (one of my favourite dividend stocks.) My aim is to only invest in shares that are outperforming the NZX top 50 index.

I very much enjoy managing my own investments and the daily routine of checking their progress, and refining my skills. That said, I appreciate others do not enjoy managing their own investments, nor are willing to learn the FA and TA skills needed. For those people managed funds, or index linked units are good options.

[Marilyn Munroe]

An excellent book on this subject is;

A Random Walk Down Wall Street

Author:Burton Malkiel

It was first published in 1973 but is still relevant. Here is the link to the Wikipedia page for the book;

https://en.wikipedia.org/wiki/A_Rand...wn_Wall_Street

Boop boop de do
Marilyn

[shasta]

I've been researching the markets and stock picking on the NZX primarily (with the odd ASX purchase) for approximately 8 years now.

Over the past week I've scoured through all my prior stock buys, sells and taking into account the commissions, foreign exchange and opportunity cost of the funds sitting in a cash management account waiting to buy the next opportunity. I've gone back to my very first buy in early 2010, Ryman Healthcare.

I've come to realize that after countless hours of reading annual reports, press releases, analyst research reports, etc that I would have been far better off to simply just drip feed into an index fund of the NZX50 or S&P500.

I was going well until year 4/5 but then my career took up a lot more of my time and energy and I moved into management roles in my later 20s. I made a couple of horrendous mistakes in my investments in the past year or two, Slater & Gordon being the big one. Then a new partner (now wife) came along and she is much more interesting than looking at annual reports in my weekends.

So all in all, a roller coaster ride with countless hours of reading and research all for the same result that could take me 10 minutes annually to replicate buying an index fund. Very demoralizing and a very big hit to the ego as I was sure that I outpaced the index even with the odd big loss.

I've thought about creating a "virtual portfolio" to keep my inquisitive side alive but it doesn't feel the same without my own cash on the line.

Anyone else come to the same conclusion or want to chip in with a story or two?

This is all part of the learning process so what you have been doing hasn't worked, time to reflect on your goals and personal situation, then look at where you fell short.

Start a new plan of what it is you want to achieve, what part of the markets do you understand/interested in?

There is a ton of good ideas/philosophies among this forum with experienced investors/traders who have done well over the short and long term.

There are a few posters i have always kept an eye on and what they are looking into/buying, but ultimately you have to work out a system that best works for you and be flexible enough to change it when things don't go as planned.

Its already been mentioned, but check the NZX/ASX comps and see how others think and what they have bought/selected, will give you leads/ideas

Personally i stick to the ASX as the NZX at the moment looks fully/over valued, my first run through a company is to read the latest presentations, if i see anything i don't like that's the end of the process and i move on. I probably have 15 - 20 companies on close watch at any time and hold just 5 stocks.

There are plenty of LIC's especially on the ASX if you are looking at more passive investments paying steady dividends with reasonable yields if you dont have the time to research individual companies.

I find having your own skin in the game keeps you focussed, virtual portfolios don't have the same emotive response.

[traineeinvestor]

The evidence is pretty clear that very few investors will outperform the index over any reasonably lengthy time period and a low cost index fund is usually the best approach for most investors (especially those not inclined to devote a reasonable amount of time managing their investments). It's hard to beat a no-load index fund if its TER is low enough.

The flip side is that the costs of fund managers etc mean that an investor willing to spend a reasonable amount of time on the exercise should be able to outperform an actively managed fund. There really is no excuse for voluntarily paying a front end load or an active management fee.

That said, as a retiree, it's not the index I want to beat – we live off the income from our investments and my objective is for our income stream to increase faster than my personal rate of inflation without taking on undue risk. The later includes having adequate diversification. Our portfolio includes real estate, index funds, actively managed funds, directly held equities, bonds, precious metals and wine. The later is more like an investment in future drinking than a serious part of the portfolio.

My equities are weighted towards companies which pay dividends and away from exciting growth opportunities which don't – I've been around long enough to know that for every ATM (congrats to everyone who got on board with this one), Tencent, Alibaba or Netflix, there are dozens of highly promising and exciting companies that disappear into obscurity. And, yes, I've invested in enough of these over the years to have learned that boring stocks work better for me.

[epower]

So as above if the majority agree it’s difficult to beat the market and put 90% into index funds and ‘play’ with the rest, why are you doing it? Purely because you enjoy the process of stock picking as more of a hobby? One that’s lined your pocket rather than emptying it?

[blackcap]

So as above if the majority agree it’s difficult to beat the market and put 90% into index funds and ‘play’ with the rest, why are you doing it? Purely because you enjoy the process of stock picking as more of a hobby? One that’s lined your pocket rather than emptying it?

In NZ if you invest in the NZ top 50 index fund (FNZ) you still pay a good .6% or thereabouts to the manager. With enough capital you can still beat this index fund by virtue of not having these annual fees by replicating or close enough to or just building your own, well diversified, portfolio. (Other than its a lot of fun too)

[huxley]

So as above if the majority agree it’s difficult to beat the market and put 90% into index funds and ‘play’ with the rest, why are you doing it? Purely because you enjoy the process of stock picking as more of a hobby? One that’s lined your pocket rather than emptying it?

Hmm, I dunno if it’s fair to characterise funds not allocated to an index fund as “play” money. As has been mentioned above, you may have individual investment goals which are not necessarily best served by indexes, such as an income focused portfolio, etc etc etc.
In the end, I think each has its place and I wouldn’t want to be too complacent and be lulled into thinking you should just blindly follow an investment strategy, particularly if your investment horizon is far off in the future..
One argument, based on game theory, says index funds have been successful instruments simply because most of the market is 'active'.. if the investment ecosystem were to move (as it appears to be doing so) more towards passive vehicles, perhaps there would be more opportunities to outperform the market average simply due to capital being more likely to be misallocated, into poor performing securities... SKT (cough cough).


Just some thoughts.. rambling really..

[BeeBop]

May well be hard to beat in a bull market but it could be different in a non-bull market where value stocks can come into their own. I don’t have figures or evidence to present, however, in bear markets, I haven’t done too badly e.g. 2000s and with the one or two stocks I owned in 2007-2009 (I had money out of the market then and was paying down debt and then went back in with avengence in 2010).

[Beagle]

https://www.harbourasset.co.nz/

No work, solid returns. Before anyone says they've made mistakes, so has everyone else.

[zgnz]

So as above if the majority agree it’s difficult to beat the market and put 90% into index funds and ‘play’ with the rest, why are you doing it? Purely because you enjoy the process of stock picking as more of a hobby? One that’s lined your pocket rather than emptying it?

So speaking as someone with a split direct/index portfolio, I recognize beating the index is hard, as it's essentially making bets against the consensus view... and since I don't have enough 'against the consensus' bets available to me to provide a diversified enough portfolio, holding some indexes allow me to sleep soundly at night (and is a safe bet for my longer term goals.)

Of the direct bets I do make, they usually perform well.

If you are still interested in stock picking, it maybe a case of going away and reading more literature (e.g. Peter Lynch, Benjamin Graham, Warren Buffett letters etc) to find a strategy/style framework that better works for you. Also don't limit yourself to just the NZX.