Do I have to outsmart the market to be a successful investor?

Simon Brown, Chartered and Certified Financial Planner, explains how it is unwise to pick funds based on their past performance, as they are unlikely to continue to outperform in the future.


Simon Brown, Chartered Financial Planner:


The simple answer is no, and the good news is nor does your financial advisor. Decades of academic research and evidence shows financial markets have rewarded long-term investors. People expect a long-term return on the capital they invest and historically equity and bond markets have provided growth of wealth which has more than offset inflation.


Instead of fighting with markets let them work for you. There are three main drivers of financial returns: Owning shares in companies where you receive income in the form of dividends, owning property where you receive income in the form of rent and lending money where you receive income in the form of interest.


This chart shows the split between investment types, otherwise known as asset classes. Asset allocation accounts for 90% of the difference in investment returns over time, so this is an important thing to get right. Those investors focused on outperforming the market through stock picking and market timing find that market pricing power tends to work against them.


If you attempt to outsmart the market your investments will be indifferent from the market, which means your investments will have a higher risk. Of course, if this risk pays off, you’ll get a large return, but this sort of speculation isn’t a good strategy for long term investment success.


Some financial advisors say they can outsmart the market by picking funds with market beating odds, protecting wealth from market falls by moving into cash, picking the time to move into strongly performing asset classes when markets are rising. None of these are safe for your long term financial success.