Beating The Market Isn't Everything

I no longer trade and churn my portfolio in search of short-term gains and so called market beating returns, like I did in my early 20's. For me it's not worth the stress and the only person gaining was my broker. I can only talk from experience, but I imagine that a lot of people will need to learn this the hard way themselves. Now I stick to long term invesments which is serving me well.

I do not how many times I have read IT annual reports where asset allocation has been responsible for the vast majority of the annual return made and stock picking for one or at the most two percent of the return.

Enough said!!!

goodlifer

Agreed.

The amount of risk - or volatility of returns - should also be take into consideration.
Higher risk may (arguably) generate higher returns, but the high volatility often associated with higher risk may not be acceptable to many mature portfolios.

Of the portfolios below, which performed better and which worse - and which would you have been most comfortable with?:

Portfolio A:
Starts at £100k, drops to £95k by mid-year, finishes the year at £110k.
£10k gains with £15k high-low.

Portfolio B:
Starts at £100k, drops to £75k by mid-year, finishes the year at £112k.
£12k gains with £37k high-low.

Portfolio C:
Starts at £100k, drops to £60k by mid-year, finishes the year at £115k.
£15k gains with £55k high-low.

Many might say that portfolio C was the best, on account of its higher total return.
However, when portfolio C was down 40% mid-year, many investors would have felt physically sick at the demolition of their life savings, and may have panic-sold to prevent further losses - therefore missing out on the recovery and ultimate higehr gains.

It's all very well seeking higher returns from higher risk, but all too many investors lose their nerve when the going gets tough.

F958B

Being primarily a dividend reinvestor, I don't have the information I need to give you a sensible answer.
If the dividends were roughly equal I'd opt for C, because there'd be more scope for opportunistic cheap buys.

"Many investors would have felt physically sick at the demolition of their life savings, and may have panic-sold to prevent further losses."
I seem to remember Uncle Warren - a man whose opinions we lesser mortals should be in no hurry to ignore - saying somewhere that if you haven't got the stomach to watch the market undervalue your pet stocks by 50%, then you and the market are not for each other

And Charlie Munger:
”Using volatility as a measure of risk is nuts".
.

I will beat the market, and I will achieve my lofty long term investment goals.
Without my belief, I would have no hope of motivating myself to gain the skills and experience necessary to achieve the goal embedded in my belief.
Conversely, accepting that you are going to only make market returns is a most definitively self-fulfilling prophecy.

After all, independent of your monetary returns, active investment can be guaranteed to always return one form of capital - experience. And, correctly deployed, this capital should gradually increase the chance of achieving the goal.

A further point is this; Unfortunately for the younger amongst us, who read the comments of the experienced stock pickers with the respect they deserve, are subject to a strongly risk-adverse message since those with experience are slightly further along the highway of life.

So don't deflate our beliefs - without them there is no point being part of this community, trying to learn and improve.
And occasionally, oh ye of market wisdom, recall how it felt to be carefree of risk, and even your losing positions contributed to the experience that enabled you to be as discerning today.

wordofandy

I would advise newcomers to read the Buffett comments which I picked form this article:
http://www.fool.co.uk/news/investing/2012/02/24/the-25-smartest-things-warren-buffett-ever-said.aspx

Good stockpicking is actually not difficult - it's an investor's emotional response to market conditions and their desire for fast action and high returns which is their undoing.

Control the emotions.

Ignore the crowd.

Don't over-trade.

Don't buy in the hope of finding an even bigger fool to buy your even-more-ridiculously-priced shares; it may be you who turns out to be the fool.

Use good business sense - if a company was a small local business offer for sale, would you take out a loan to buy it based on the price the market is asking and the likely cashflows you'd get from the business if you were to hold it for many years?
(this is akin to most private investors historically tending to make much more money from property than shares; it's because they do their sums, take a long-term view and are unable to keep flitting from one investment to another).

Follow Buffett and find several 1ft bars to step over and not try to leap over 7ft bars; it hurts if your 7ft jump goes wrong and you land on your face.

I'd pick Portfolio C:

Starts at £60k at mid-year, finishes the year at £115k, with £55k gains: then sell the lot.