Last year, several investment banks conducted a study to assess how successful private investors were at managing their portfolios. The study quizzed private investors across the market, both large and small, to try and establish if low-cost self-directed investing really is a better option than investing with an asset manager.
The results of the private investors study were very revealing. For example, the investment banks found that the average individual investor believes that their returns average approximately 10% per annum — comfortably beating the FTSE 100. However, these results couldn’t be further from the truth.
Indeed, another study, this time conducted by a number of financial institutions over a 20-year period found that the average investor has only returned 2.5% per annum including dividends. This paltry return is, in a word, shocking.
Underperforming
An anaemic return of 2.5% per annum means that private investors managing their own accounts underperformed nearly every financial instrument bar one over the 20-year period studied. In fact, the only market that put in a worse performance than the average investor over this period was the Japanese stock market.
And for all the bad press hedge funds receive, over the past two decades they have returned 6% more per annum than the average private investor, even after deducting their notoriously high fees.
On the other hand, over the past two decades the FTSE 100 has returned 5% per annum including dividends. Over the past three decades, the FTSE 100 has returned 5.5% per annum. Meanwhile, the FTSE All-Share has returned closer to 6% per annum. Including dividends these returns would be closer to 10%.
Wealth creation
According to my figures, a £1000 investment in the FTSE All-Share, yielding 3% per annum, with capital growth of 5.9% would turn £1,000 into £8,200 over a period of 30 years. In comparison, a return of 2.5% per annum for the average private investor would have turned £1,000 into just £2,100 over the same period.
What’s more, returns of 10% are possible even with little to no work on the part of the investor. Research has shown that private investors’ performance has been so dismal because investors tend to trade too much. Indeed, investment manager Fidelity, which looks after $5.2trn of customer assets, found that the investors achieving the best returns on its assessment management platform had forgotten their accounts actually existed. When it comes to investing, sometimes less is more.
Time to track
So, if you want to achieve steady returns with minimal effort, the best way is to buy a low-cost tracker fund. The best FTSE 100 trackers are the BlackRock 100 UK Equity Tracker, Fidelity Index UK, which charges 0.09% and the db x-trackers FTSE 100 UCITS ETF, which charges a lowly 0.09%.
For the FTSE All-Share, Vanguard FTSE UK Equity Index charges 0.15%, BlackRock UK Equity Tracker offers index replication for 0.16%, and the Legal & General Tracker Trust charges 0.16%.
Of course, tracking the market means that the chances of you outperforming are almost non-existent. However, as the figures show that most investors fail to match even the market’s return, tracking the market does seem to be the better option.