|You have planned your asset allocation.
You have decided on your level of exposure to equities. What
return are you hoping for?
If you are buying shares direct
80% of transactions in the market are made by investment professionals.
Therefore when you are buying the chances are 4:1 that the seller
is a pro. And when you are selling the chances are 4:1 that the
buyer is a pro.
What makes you think you know more than the pros?
You should aim to be average
Sound kind of boring, doesn't it? But how could you expect to be
otherwise? There are plenty of stupid and misguided private investors
in the market, and you will beat them: and there are some professionals
to whom the same adjectives apply, and you will beat them. But you
have to beat 60% of the professionals to be average, and that is
already asking a lot.
The most important characteristics of the amateur
investor? Humility and realism.
If you cannot beat them, join
Maybe you should use these professionals to work for you by buying
unit trusts or investment trusts?
Unfortunately the studies show that the great majority
of these trusts fail to beat their benchmarks because their running
costs exceed the value added by the skill of their managers. Unit
So you cannot win that way either.
Average is good
If you are average overall you will have done well:
- You will have found low-cost unit or investment
- You will have kept your own trading to a
minimum to reduce costs
- You will have invested in sound companies,
not speculative froth
- You will have avoided tips
- You will have diversified to avoid excessive
reliance on one company or sector.
And by achieving average you will have collected the
premium that is the reward for equity investment. And allowed
the magic of compound
interest to work for you.