Average is Good

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 40% of the professionals and nearly all the amateurs 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 them?

Maybe you should use these professionals to work for you by buying funds?

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. 

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 trusts
  • 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 risk premium that is the reward for equity investment. And allowed the magic of compound interest to work for you.