Why do we think we can beat the market?
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Last week’s launch of the FT’s annual stock picking contest prompted a flurry of emails from readers. The purpose of the competition is educational — we want to encourage more people to get into investing. However, some of you are (quite rightly) concerned that trying to select the best or worst performing shares in 2024 encourages investors to favour short-term gambles over investing wisely for the long term.
As a committed index fund investor myself, I know that winning a competition and devising a winning long-term investment strategy are two very different things — but I wanted to devote this week’s column to exploring this further.
To win a stock picking contest, you have to go for death or glory. We ask readers to go long or short on the five shares they think will rise or fall by the greatest amount by the end of the year.
As our report last week clearly showed, the winners throw caution to the wind and make big bets which (with luck) might come off. However, as our ultra-bearish columnists on the Unhedged newsletter found, such reckless behaviour can also land you at the bottom of the table — a lesson in itself.
No money changes hands in the FT competition, and I stress that none of my colleagues would invest their real-life portfolio in this way. But one of the reasons contests like this are so popular is because, deep down, every investor secretly believes that they might be able to beat the market.
The FT contest provides a “safe space” to try and achieve this, but the truth is, very few of us can — and even fewer can do so consistently. Even the FT’s Miles Johnson, twice the winning journalist in past contests, saw his picks plunge by nearly 70 per cent in 2021.
If your 2023 picks ended up in the black, the next question to ask is whether your gains were ahead of what the wider market offered.
At the request of one FT Money reader, I asked our stats team to crunch how many entrants last year equalled or bettered the performance of the Fidelity Index World Fund, a popular global index tracker, which rose by 16.5 per cent over the same period.
The answer was 38 per cent. Or to put it another way, 62 per cent of people spent a lot of time and effort trying to select market-beating stocks, yet still failed to beat the market.
However, FT readers fared a little better than professional fund managers. The latest Manager vs Machine report from stockbroker AJ Bell shows just 36 per cent of active fund managers beat the average passive alternative in 2023 across seven key equity sectors.
One year is admittedly a short timeframe to judge performance, but over 10 years, just 32 per cent of active managers beat their benchmark.
Thus, most investors in active funds have not only failed to beat the market, but they’ve paid for the privilege in the form of higher investment fees. Laith Khalaf, head of investment analysis at AJ Bell, notes this dawning realisation is reflected in fund flows over the past five years, with £9bn withdrawn from active funds and £75bn flowing into passives.
So how did I fare in the FT’s most recent competition? Sadly, I was too busy to submit an entry! The lack of time I have to devote to monitoring my investments day-to-day is yet another reason why I don’t trade individual shares in my non-fantasy portfolio.
However, that’s not to say you shouldn’t — just limit your risk exposure. Another factor to consider is the huge enjoyment that FT and Investors’ Chronicle readers get from running the rule over companies that might have the potential to outperform.
“Even if passives form the foundation of your portfolio, reserving a small proportion for investing directly into shares will help you learn more about what’s actually in your tracker funds, and discover really interesting companies,” says Rosie Carr, the IC’s editor.
If this appeals, take further inspiration from Robbie Burns, author of the Naked Trader blog, who outlined his disciplined approach to buying and selling shares on my Money Clinic podcast.
Prefer passives? The wonderful array of cheap index funds that investors can access with a few clicks on their smartphones means it’s never been easier to invest. Nevertheless, low levels of financial education mean that huge barriers to engagement remain.
A recent survey by Boring Money, the consumer website, found that more than one in five people did not know that the money in their workplace pension was being invested — let alone what it was invested in.
While passive funds are not permitted by the FT competition, here are a few that could form the building blocks of your own long-term portfolio.
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If you’re looking for a cheap, diversified all-in-one solution that automatically rebalances, Vanguard’s Life Strategy range is incredibly popular (I hold the 100 per cent equities fund in my own portfolio, and so do other family members). HSBC’s Global Strategy Portfolios offer a smaller range to choose from, with a similar objective.
Big companies have been the place to be recently, but historically, smaller companies have produced superior returns over longer periods of time. My own long-distance portfolio contains a small allocation to Vanguard’s Global Small-Cap index fund, which has exposure to over 4,000 smaller company stocks in developed markets — just one of many ways that passive funds and ETFs can provide access to themes that interest you.
As for my short-term stab at a 2024 competition entry, over the years, Tesla has been the most popular pick (whether long or short). I’m going to short it in 2024, mostly because the list of people I know who regret buying a Tesla is getting longer.
My next high conviction trade is buying the UK (there’s an outside chance hopeless optimism could be a winning strategy). I’m betting that falling interest rates and the likelihood of pre-election tax giveaways will (eventually) boost the UK property market in the year ahead.
Are you a champion stock picker?
Enter this year’s stock picking competition at FT.com/stockpick2024
And read our review of the 2023 competition
I’m going long on Rightmove, the online estate agent; Vistry Group, a lesser-known FTSE 250 housebuilder and on the commercial side, Shaftesbury Capital, the West End’s biggest landlord. Finally, the London market may not have many tech companies, but we do have world-class scientific ones, so GSK is my final buy.
While I fully expect my fantasy portfolio will come a cropper in the year ahead, I can afford to be wrong in a competition. I will enjoy seeing what other readers have selected and why, but when it comes to the real-life version, I’m sticking with my long-term passive centred strategy.
Claer Barrett is the FT’s consumer editor and author of the FT’s Sort Your Financial Life Out newsletter series; claer.barrett@ft.com; Instagram @ClaerB
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