Investors often seek some kind of edge. They follow investment trends, listen to economic experts, and search for the hottest unit trusts or stocks. By doing so, however, many jeopardize their investment returns. It’s ironic. Most investors underperform the returns of the average stock—by paying high fees, reacting to investment news and trying to make forecasts.
In the three years ending October 28th, the Malaysian stock market gained 28.87 percent. Most Malaysians likely did worse.
In the U.S., a firm called Dalbar tracks the returns of retail investors, compared to the U.S. stock market’s performance. U.S. stocks averaged 9.14 percent a year between 1990 and 2010. But the average investor in U.S. stocks made just 3.83 percent per year. Worldwide studies confirm similar trends. Instead of sticking to a solid investment plan, we often jump around. Doing so costs more money in fees. And today’s hottest investment can be tomorrow’s biggest loser.
Consistently forecasting the next hot stock or sector is almost impossible. The Chicago based firm, CXO Advisory, tracks the results of high profile forecasters. And their results aren’t pretty.
Between 2005 and 2012 the firm collected 6,582 forecasts for the U.S. stock market offered publicly by 68 experts. CXO Advisory found that just 46.9 percent of the forecasts proved accurate. Odds are better flipping coins.
So how do you earn better investment returns? In my latest book, The Global Expatriate’s Guide To Investing, I outline three low cost strategies. Each method takes less than an hour a year. You wouldn’t have to follow the economy or the stock market. And studies prove each strategy outperforms the vast majority of professional investors.
The methods mirror what Warren Buffett endorses. Economic Nobel Prize winners agree, as does Yale University’s endowment fund manager, David Swensen. They say investors should shun speculation and invest with low cost index funds.
Each strategy in my book utilizes low cost ETFs. You could buy such index products through a brokerage. I explain how those of different nationalities can tweak the methods–emphasizing their home country market in the process.
Instead of chasing the hottest markets or products, investors should focus on building a diversified low cost portfolio. Malaysians would include a home country stock index, an international stock index and a bond index. Once a year, they would see how their portfolio performed. And here’s where the process is counterintuitive. Instead of adding fresh money to their top performing investment (as most people do) they need to do the opposite.
They could do this, one of two ways. They could add fresh money to their worst performing index, or they could simply rebalance. This rebalancing ensures that they sell a little bit of what has performed well, adding the proceeds to the underperforming index. After all, asset classes and different stock markets always have their days in the sun. Last year’s loser often becomes next year’s winner.
You don’t need to listen to economic forecasts. Just once a year, simply rebalance the portfolio back to your original allocation.
The Global Expatriates Guide To Investing shows what kinds of products to buy, and where you could open a brokerage account. This low cost, simple strategy is a great answer to the enemy in the mirror.
This article is a contribution by Andrew Hallam, a person I respect much and whom I interviewed in 2012 – Immediate Personal Finance Lessons for Everyone