Following a simple investment strategy can lead to financial success, writes Peter Watson.
It is very easy for investors to make mistakes when managing their investment portfolio.
Many investors attempt to build their portfolio by choosing individual stocks to purchase or hiring a manager that would do that for them. The hope is to outperform the underlying market.
Why settle for market average returns when the attempt is to pick a few winners that will outperform. Evidence illustrates that this can be a disappointing strategy.
Actively managed stock portfolios rarely outperform the underlying market index they invest in. Standard & Poor has been reporting this for the past two decades. The results consistently show this is a failing strategy.
Last year two thirds of all managed funds that were invested in stocks listed on the S&P 500 had a return that was less than the average return of the entire index. This information was reported by SPIVA which stands for Standard & Poor Index Versus Active, as of December 31, 2024.
After the last five years, three quarters of managers underperformed the index and after 15 years the total number of managers that underperformed was 90 per cent.
My recommendation is to attempt to earn an average return of the underlying market. For the S&P 500 the average annual return over the last 100 years was 10.5 per cent.
Taking this passive approach to investing does not mean you are not a very proactive investor. Spend time considering your financial objectives, financial circumstances, the total cost of investment fees and how to build your portfolio in the tax effective manner.
Have a written plan that articulates what you are trying to achieve and outlines the specifics of how that can be done. Review your plan at least annually.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com
