Last year, several investment banks conducted a study to assess how successful private investors were at managing their portfolios.The study quizzed private investors across the market, both large and small, to try and establish if low-cost self-directed investing really is a better option than investing with an asset manager.
The results of the private investors study were very revealing. For example, the investment banks found that the average individual investor believes thattheir returns average approximately 10% per annum comfortably beating theFTSE 100. However, these results couldnt be further from the truth.
Indeed, another study, this time conducted by anumber of financial institutions over a 20-year period found that theaverage investor has only returned 2.5% per annum including dividends. This paltry return is, in a word, shocking.
An anaemic return of 2.5% per annum means that private investors managing their own accountsunderperformed nearly every financial instrument bar one over the 20-year period studied. In fact, theonly market that put in a worse performance than the average investor over this period was the Japanese stock market.
And for all the bad press hedge funds receive,over the past two decades they have returned 6% more per annum than the average private investor, even after deductingtheirnotoriously high fees.
On the other hand, over the past two decades the FTSE 100 has returned 5% per annumincluding dividends. Over the past three decades, the FTSE 100 has returned 5.5% per annum.Meanwhile, the FTSE All-Share has returned closer to 6% per annum. Including dividends these returns would be closer to 10%.
According to my figures, a 1000 investment in the FTSE All-Share, yielding 3% per annum, with capital growth of 5.9% would turn 1,000 into 8,200 over a period of 30 years. In comparison, a return of 2.5% per annum for the average private investor would have turned 1,000 into just 2,100 over the same period.
Whats more, returns of 10% are possible even with little to no work on the part of the investor. Research has shown that private investors performance has been so dismal because investors tend to trade too much. Indeed, investment manager Fidelity, which looks after $5.2trn of customer assets, found that the investors achieving the best returns on its assessment management platform had forgotten their accounts actually existed. When it comes to investing, sometimes less is more.
Time to track
So, if you want to achieve steady returns with minimal effort, the best way is to buy a low-cost tracker fund. The bestFTSE 100 trackers are theBlackRock 100 UK Equity Tracker,Fidelity Index UK,whichcharges 0.09% and thedbx-trackers FTSE 100 UCITS ETF, whichcharges a lowly 0.09%.
For the FTSE All-Share,Vanguard FTSE UK Equity Indexcharges 0.15%,BlackRock UK Equity Trackeroffers index replication for 0.16%, and theLegal & General Tracker Trustcharges 0.16%.
Of course, tracking the market means that the chances of you outperformingare almost non-existent. However, as the figures show that most investors fail to match even the markets return, tracking the market does seem to be the better option.
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