How many investors can actually beat the market consistently over the long-term? According to Lars Kroijer, an ex-hedge fund manager and author, only one in ten is able to do so. That’s actually on the optimistic side.
According to a research covering more than 40 studies on retail investors’ returns in the stock market, only one in a hundred beat the market after costs.
While these numbers might differ across different markets, the main idea is that beating the stock market is indeed very unlikely for retail investors, especially for the average Joe without much financial background and time.
As such, Kroijer is proposing a simple portfolio strategy especially for retail investors who are not confident in beating the markets or picking an investment fund to do it for them.
He illustrates this idea with a video series Investing Demystified but for those who just want the gist of the idea, this short article would do you the favour.
Best returns at the cost of reasonable risk
Now, if you are willing to take the risk of picking individual stocks for higher possible returns (and higher possible losses too, of course), then this simple portfolio strategy might not suit you.
Kroijer made it clear that this is for the average retail investor who doesn’t want to move around the market too much and is in for the long-term. Therefore, before you consider this, ask yourself these questions:
1. Do I prefer investments that do not require much financial knowledge and research?
2. Am I fine with returns slightly above the average inflation rates?
3. Can I stick to two assets for the long-term (at least 10 to 20 years)?
If your answers to the above questions are ‘yes’, then Kroijer’s simple portfolio strategy might be your best bet in at least beating inflation and majority of the retail investors (in the long run).
Always only buy one world equity index tracker
The first and most important principle to understand from Kroijer’s idea of a simple portfolio strategy is to invest in no other stocks except a global index tracker that blindly follows equities around the entire world.
By picking a global index tracker, one gets diversification at a cheap cost with little to no effort and based on our multi-trillion dollar global financial market. Since we can’t beat the market, let’s allow our dollar to follow the market’s footsteps.
The fact that majority (about nine out of ten or more) of the investors can’t beat the market, by investing in a world equity index tracker, one would already be outperforming the majority.
But note that some “global” index trackers (or known as ETFs) do not include emerging markets, so be sure to keep a look out for this. Apart from a world equity index tracker, Kroijer added one more asset to the simple portfolio.
Balance risk with government bonds or equivalents
Regardless the amount of diversification the world equity index trackers can give us, there is still some element of risk. To balance out that little bit of risk, Kroijer’s simple portfolio strategy includes government bonds alongside a world equity index tracker.
Of course, one doesn’t necessarily stick to government bonds, other extremely low-risk low-return assets like bank fixed deposits would work the same. The key role of this component in the simple portfolio is to offset the amount of risk we are exposed to in the world equity index tracker.
That way, we are able to enjoy the returns of the world equity index tracker and at the same time, get a peace of mind since we have a portion of our investment money safe in government bonds or equivalents.
Adjust proportion according to risk preference
The last and final step to Kroijer’s simple portfolio strategy is to adjust the proportion of both the world equity index tracker and government bonds, depending on one’s risk preference.
For one in the later or retirement years, a higher percentage of one’s investments should be in the safe asset (government bonds or equivalents), mainly because preservation of capital is more important than growth of capital.
Conversely, for millennials or young working adults, a larger portion can be allocated to the risky asset (world equity index tracker) – growth of capital is the main objective to achieve the financial goals one in the earlier years.
In a nutshell, Kroijer’s simple portfolio strategy would work for retail investors who are generally more risk averse and happy with returns just to beat inflations over the long-term.
It is indisputable that short-term traders might stand a chance of beating the market and conservative investors, but that would require a lot more financial capabilities and appetite for risk. It all boils down to individuals and their preference.
*Key points are taken from the Lars Kroijer’s video series Investing Demystified and all pictures/moving pictures are grabbed from the videos. Below is the first video of the series.