Should you pick stocks or buy the lot? The odds can be in your favour if you make the right choice…
In recent times, financial news has been dominated by the surging share prices of Tesla, Amazon and Zoom, to name a few. Predictably, this has led to many investors cursing themselves –
“Why didn’t I buy TSLA or AMZN when the price was lower!?”
“Obviously ZM was going to skyrocket, I should have bought in early!”
Such tales of triple-figure returns (Tesla shares have risen nearly 700% since January 2020) have led many, desperate not to miss out, to shift their savings into the stock(s) they think are going to be the next success story.
The strategy of stock-picking – placing a bet on one or a selection in the hope that it will shoot the lights out and deliver a tidy profit – in theory sounds sensible. But in practice, the odds are firmly against investors who try their luck. If it provides any comfort to the DIY investors out there, the vast majority of paid financial professionals are pretty useless at picking stocks too.
Investment managers are paid to research and buy the stocks they expect to generate superior returns (known as active investing), rather than just buying the market as a whole and getting the return from the average of all market constituents (known as passive or index investing). Over a meaningful time period (10 years), only a dismal 7% of those fund managers delivered a return in excess of the market as whole.
Despite glossy marketing and impressive literature to suggest otherwise, more than 9/10 investment managers can’t do any better than the market as a whole. It’s a myth that superior returns can be consistently achieved by stock picking, but thankfully there’s an easier way.
Capture the market return, using a ‘tracker’ fund that buys the market, and you turn the odds in your favour.
There it is – it really doesn’t need to be any more complicated than that.
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Liam Kerr is a Financial Planner at Carbon and can be contacted at firstname.lastname@example.org
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