plonkee money an english-er's thoughts on personal finance

February 14, 2008

don’t look for better than average returns

Filed under: investment — Tags: , , — plonkee @ 12:00 pm

I’m rich!!!You can tell that it’s coming towards the end of the financial year when you start seeing lots of adverts for investment funds.

The other day, I was on a business trip to London and there were several ads in the tube, all for fund management companies looking for investors. I’m not against them advertising, after all, they have to make a profit and so need customers. However, just buying an investment from a fund manager is almost never the cheapest way of doing so – fund supermarkets and/or discount brokers can get you the same product cheaper.

In addition to being one of the more expensive ways of investing, the fund management companies were selling themselves on their desire (and implied ability) to beat the market. These are dangerous words.

Most novice investors think that beating the market is a good thing. And, they are of course, right. If you do beat the market and make money, that is good. Trouble is, wanting to beat the market, and actually doing so, are not one and the same.

I’m a big fan of just settling for an average return.

That’s because you can get an average return (minus tracking errors and fees). If I invest in an index fund then it’s performance will track the index – that is to say, it definitely will be average. Which means that it won’t do worse than average.

Pretty good going, when you consider how many investments that aim to beat the market, in fact do worse than the market average. After all, not that many people start off by thinking that they want to do worse. But if someone does better than average, then someone else must have done worse – that’s how averages work.

Image by Gaetan Lee

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