Beat An Index Fund: 10 Ways You Can Outperform The Market
By Rupert Hargreaves It’s no secret that active investment managers have always struggled to outperform indexes, and this knowledge has sparked an explosion in the demand for low-cost index-tracking products. While this approach does ensure that your returns will be similar to those of the index, it also stops you from beating the market. If you have the time to conduct detailed investment research yourself, there’s no need to consign yourself to these average returns. Beating the index (whichever one you’re following) is possible if you’re willing to put in the effort, and this is something Tweedy, Browne recently looked at in one of their investing booklets titled, ” 10 Ways To B eat An Index: How Tweedy, Browne Strives to Provide Value Above the Index Return .” Click to enlarge 10 ways to beat an index Choose stocks with appealing investment characteristics that have produced market-beating returns in the past. Cover the entire market universe: Do not eliminate stocks from the research process that are either too big or too small. Significant undervaluation offer occurs among smaller companies that aren’t covered by Wall Street. Statistics and specifics: Conduct one-at-a-time specific company research that generates value-related, forward-looking information as well as insights that are not available elsewhere, coupled with statistical thinking about investments that is likely to lead to above-market returns on a diversified basis. No index mimicking: Focus on stocks with robust prospective return characteristics rather than attempting to beat the index by mimicking its composition. Stay as fully invested as possible: Research has shown that 80-90% of investment returns have occurred in spurts that amount to 2-7% of the total length of time of the holding period. The rest of the time the returns have been small. To quote Tweedy, Browne, “With stocks, you have to be in to win”. Keep turnover low: Low turnover reduces commission and tax costs as a percentage of the portfolio’s overall value. Keep transaction costs low (see above). Act like an owner: Follow Benjamin Graham’s advice that by buying shares you are buying a stake in the business, not a lottery ticket. Focus, focus, focus: Pay attention to your existing investments as well as potential new investments. Be aware of any changes in underlying business fundamentals and the competitive environment. Continuous improvement: When it comes to investing, you can never know enough, and by increasing your knowledge of investment characteristics and patterns associated with above-market returns, you’ll be able to understand what works in various market conditions and be prepared for any developments the market may choose to throw your way. Constantly sifting through the vast volumes of information out there on equities and equity markets will help you gain awareness of the best strategies, investments, opportunities, and indicators that are available to help you optimise your performance grow your wealth and beat the index. Disclosure: None.