One common misconception about investing in the market index is that it destines you to be ‘average’.
After-all, who wants to sign up to an investing strategy (or any life pursuit) that promises to be mediocre?
This couldn’t be further from the truth. In this months’ performance update we’ll show how indexing has been the safest way to beat average and even be in the top 1%.
The Stockspot portfolios have now been running for 5 ½ years.
Over the 5 years to 30 September 2019, our portfolios have returned between 7.5% per year (Amethyst) to 10.0% per year (Topaz) after fees. Over the shorter 1 and 3 year timeframe the returns are higher still.
|1 year||3 years (p.a.)||5 years (p.a.)||Total return|
Returns as of 30 September 2019 after fees
There have been bumps along the way. Shares dipped 20% during 2015/16 and saw some large movements in 2018. Despite this, all of our portfolios have delivered positive returns every year, including 2018 when most assets fell.
During market speed bumps, our portfolios have only experienced half of the risk of shares thanks to the insulating effect of owning assets like bonds and gold.
How does that compare?
Without context it’s hard to know if that’s a good or bad result. So we’ve compared how our portfolios have performed relative to 439 similar funds available in Australia over 3 and 5 years.
You’ll notice a theme from the table and charts below:
- Stockspot beat between 97.5% and 100% of other funds over 5 years! For example of the 199 growth funds, our most popular Topaz portfolio beat 198 of them (99.5%) after fees over 5 years. That’s something we’re really proud of!
- The other funds have widely varied returns – some have done well, while others have done poorly. Very few have managed to do consistently well over 3 and 5 years.
|Stockspot portfolio||Percentage of similar funds that Stockspot outperformed|
How do Stockspot portfolios get to the top of every category?
You’re probably wondering how that’s possible? How could the Stockspot portfolios, which only invest in low-cost ETFs, beat almost all of the professional fund managers taking active views of different shares and asset classes?
The answer is simple.
Investing is a zero sum game compared to the index. For every winner there is a loser. On average, “the rest” can only ever deliver the market return before their fees.
After fees are subtracted research shows about 75% of active managers underperform the market each year. Over 10 years The Pensions Institute found that only 1% of funds were able to produce enough returns to offset their costs.
A similar comparison in the UK showed a simple ‘no brainer’ portfolio of index funds (similar to the Stockspot portfolios) “outperformed virtually all the corresponding funds in the same risk profile on a risk-adjusted basis over three and five years”.
At Stockspot we exclusively invest into low cost ETFs. We consider them to be a safer, lower cost, more transparent, and tax efficient way of investing.
Our returns compared to peers over the last 5 years support this and demonstrate the power of our simple, time-tested principles in an industry full of unnecessary complexity.
Source: Morningstar investment fund universe, Stockspot Amethyst, Turquoise and Topaz portfolios
How to be above average?
Investing returns are never guaranteed, especially over the short term. However there are actions you can do to stack the odds wildly in your favour.
Here’s how Stockspot has stayed well above average over the years:
1. Diversify broadly
We own a wide mix of different investments to give you exposure to different sectors, countries and asset classes. This will help to smooth the bumps and keep you invested throughout the inevitable ups and downs.
A mix of growth assets like shares as well as defensive assets like bonds and gold is important. It also means you have many sources of returns. This chart shows where returns have come from.
2. Keep costs low
There’s no need to go funky! Double leverage. Deep value. Low volatility. Smart beta. These are all marketing terms that probably won’t help you achieve a better result. Simple low cost ETFs that track the whole market are all you need.
3. Stay the course
Don’t be tempted by scary market headlines. Most market news is already included in the price so trying to time your ins and outs is likely to cause more harm than good. Just stick with it and top up where you can with any extra savings.
That’s the secret to being above average.Any advice contained in this article is general advice only and has been prepared without considering your objectives, financial situation or needs. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate advice. Please read our Financial Services Guide before deciding whether to obtain financial services from us.