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Here’s How Private Investors Can Thrash Fund Managers!

On paper, it is no contest. Private investors shouldn’t have a prayer of beating highly paid investment professionals such as fund managers.

It’s rather like showing up at Stamford Bridge in your boots and expecting to give Jose Mourinho’s boys a run for their money.

Fund managers certainly have all the advantages. They have the brains (mostly). They have the back-up, with teams of staff and fancy data analysis. And they have the weaponry, with the ability to wield complex instruments such as derivatives and default swaps.

Up against them is little old you, with your laptop and broadband connection. How can you begin to compete?

It is a daunting task, but you have plenty in your favour.

Time Is On Your Side

Fund managers are under constant pressure. They have to report every quarter, half-year and of course annually. If performance slips they will soon find it harder to attract new investors, and existing ones will soon abandon them.

This persuades too many to play it safe. Some succumb to the temptation of benchmarking, refusing to stray too far from their index in case they get lost along the way. They operate like trackers, but with higher charges.

Others get too active, nervously flitting between different assets and instruments to cover their backs in case markets crash.

You don’t have to do any of this. If your portfolio falls, nobody minds but you. This allows you to play a longer game. You can buy an out-of-favour stock and bide your time until it comes back into fashion. And there is no boss to shout at you during an annual review.

You Have Greater Freedom

Most fund managers play to strict rules. They can only invest in certain assets or sectors. They must keep a percentage of their portfolio in cash. Or hold a minimum number of stocks, which dilutes performance. And they have to dump stock when investors sell up.

You, frankly, can do what you like.

You Are Cheaper

If you hire a fund manager, you have to feed him. Many will swallow up to 1.5% of your money each year, even if your investments fall in value. Others will help themselves to juicy performance fees, at your expense. Your services, however, are free. If you invest in individual stocks, all you have to pay are trading charges, stamp duty, and maybe the bid/offer spread. And you can keep those to minimum with a ‘buy and hold’ strategy.

You Can Track

Brand-new figures from S&P show that 55% of actively-managed funds investing in the UK equity market underperformed in 2014. That’s right more than half weren’t up to the job. Maybe the competition isn’t so daunting after all.

That means you could have beaten more than half of all fund managers simply by investing in a low-cost index tracker. Investing isn’t football. The little guy can win.

To beat the big guys regularly, you need a strategy.

This latest specially-commissioned Motley Fool report sets out how ordinary private investors can become millionaires by investing in the stock market over the longer term.

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