July 19, 2018
There are an absurd number of investing articles online and in print about what investment actions to take to “beat the market.” Regardless of whether any of them have actually studied investing formally or read a variety of academic research on the topic, it seems like everybody and their mother has some advice to give about beating the market. Some of this advice is actually pretty interesting to read too! The crazy thing is that very few people should ever concern themselves with that as a goal though. How many people do you know whose actual goals are summed up by “beating the market”? No matter what they outwardly say about wanting to beat benchmarks, it sure seems to me that it’s more important that most people beat the hurdle of having enough money to retire or to send their kids to college…
Therefore, a better question to ask would probably be: what are the most important/impactful things I can do in order maximize my portfolio returns, given the stated portfolio risk level that I’m targeting?
Given that everyone is constrained by their time that they want/have available to dedicate to investing their assets, it’s crucial to start with the most important priorities and work your way down to the least important priorities if you still have time. He’s my suggested list of priorities that are the most important determinants of long-term return, but others may have different ideas:
I only go to this much detail here because it kills me with how much emotions come into investing, especially with how important it seemingly is for people to try to beat some arbitrary index or with how “home country bias” affects investors all around world. Most of these “beat the market” articles seem to heavily emphasize a how-to approach to making investing simple, yet the ideas they suggest about spending time picking dividend stocks actually have such an incredibly small effect on portfolio performance. Plain and simple, you need to get the fundamentals of deciding how much to allocate to asset classes and specific attractive regions first.
As for a couple other themes that often come up in these “how-to beat the market” articles, I do mostly agree with the sentiment of buy & hold strategies, as long as it effectively means investing for long time horizons. I don’t fully agree with a strict buy & hold strategy though, since that is effectively an anti-value play if you’re not rebalancing periodically out of winners that have become relatively expensive and reinvesting that money into the cheaper/better opportunities. On a related note, automatic dividend reinvestment is good for those who don’t plan on taking an active role in their investments, since it keeps investors more fully invested over time without any effort; however, the underlying takeaway is not that using an automatic dividend reinvestment feature is the winning strategy. Instead, investors should redeploy dividends & interest quickly into what they deem is the best way to increase return, given their portfolio constraints.
Investors get more and more educated every day, which is encouraging. Just looking to help everyone ask the important questions first so that they can get themselves and others around them closer to their financial goals!