Is it Important to Beat the Market?
Many investors devote all their time and efforts to identifying the next stock, market, sector or fund manager that will help them outperform the market. One of the first things you might do when reviewing an investment factsheet is to glance at the performance numbers and see if the fund has beaten its benchmark.
It seems intuitive that the best route towards maximising your investments is to seek the highest return. After all, who wants low returns?
Regular readers of our insights will know that we are huge proponents of diversification; using popular stock indices such as the S&P 500 does not constitute a diversified investment. As such we looked at inflation-adjusted returns for the entire investable U.S. stock market (represented by CRSP Total Market Data) to investigate this. It’s used as there is a longer data set than current global benchmarks.
(See chart above) Imagine that you had outperformed the market by 5% p.a. for the twenty year period from 1960-1979. That would give you a 2.15% + 5% = 7.15% return. Quite decent.
However, you would still have less wealth than if you underperformed the market by 5% annually for the period twenty-year period of 1980-1999. That would 13.34% - 5% = 8.34%.
For one, investing during the right cycle is important, but the key here is not to give up market returns in an effort to chase performance.
To outperform the market is by definition to do something different from the market. Many investors forget that this is a double-edged sword, it can bring you higher returns if the bet is correct, but it exposes yourself to high risks, open up opportunity for large losses. You don’t even have a guarantee for that 5% outperformance you were looking for.
Beating the market is one of the hardest things that most investors aspire to do, however it is by no means impossible. Our systematic investment construct allows us to target higher returns without sacrificing market returns with a strict focus on putting risk first.
There are also lower hanging fruits that one can reach for in the quest to maximise their wealth, such as increasing savings rates, ensuring your are investing in efficient portfolios and investing more during times when the markets are on bargain.
In the same way that you would rely on a doctor to treat you or a professional mechanic to service your automobile, investors can benefit greatly by working with an adviser — giving you the peace of mind knowing that your plan is in the hands of a professional.
If you would like to get started on protecting and growing your wealth, click here to schedule a exploratory chat with us. (Complimentary 30-minutes session)