Have you ever read an article or news story about a company in business and their success and thought to yourself – that would have been a great investment? Or even worse, have you ever invested in a company you thought was destined to great things, only to see your investment dwindle over time? Well let me tell you you’re not alone!
Stock picking (picking the best performing investment out of a whole bunch of possibilities) is a tricky game. Even the professionals often get it wrong.
I read an article recently (original article here) that analysed the results of one of the ‘top’ online investment research companies, that publishes an annual report on their best investment picks for the year. In this article, it was found that had you invested in their best picks, the return you would have received would have been significantly lower than the market return (-12.27% compared to the market return of -9.10%). This shows how difficult it is for companies with significant funds and people power dedicated to investment research to get it right, and suggests you need to be really careful when looking for tips to invest.
Vanguard, an investment giant and research company have also recently analysed the performance of professional investment managers over the longer term, and found that over 70% of investment managers fail to do better than the market return over a five year period (research paper here). If the professional managers (READ: global giant investment powerhouses) can’t get it right, what hope does a single investment adviser or advice group have?
You need to think about this and the risk involved with thinking you can beat the market when you go to invest your money. If you don’t you can end up holding yourself back from getting the return on your investments you should and this can mean it takes you even longer to reach your investment goals.
Diversifying, or spreading your investments across a wide variety of companies is a great way to reduce the risk associated with any one investment, and can mean that over time your funds perform in line with the market.
As you can see from the two examples above, putting your faith in an investment manager or even an Adviser to perform better than the overall market is a risky game, and one that can cost you bigtime if you get wrong. Don’t sell yourself short by thinking an investment adviser has the superpowers needed to consistently make better decisions than the other millions of investors in the world.
If you have time on your side and many years to invest, stock picking can add unnecessary risk to your financial strategy. Make sure you get the right advice from the start so you don’t fall into this trap!