Did you know that 95% of portfolio managers don’t beat their index? How can you be better than them?
I’ve been bombarded by such assumptions over the past 15 years as an investor. Imagine that professionals surrounded by scores of analysts doing research 7/24/365 and fueled by virtually unlimited amounts of cash to support their work, can’t beat the market most of the time. And us… novice investors reading a few free investing websites and financial reports think we can beat those professionals. Because if you can’t beat them, why bother spending a part of your free time doing your own research and managing your own investments?
Are You Able to Beat Other Types of Professionals?
I know for a fact that I can’t beat a pro soccer player, heh! I can barely compete with people from my own city! I also know I can’t diagnose illness and find accurate remedies better than a doctor or a pharmacist. Same rationale applies to the mechanic taking care of my car, the engineering team who designs a bridge and the contractor who built my house. I can’t be better than them, mainly because it’s their job and they are professionals. They have more knowledge, more experience and more resources than me in their specific field.
I’m pretty sure you feel the same about the professionals I just mentioned. But why do we think that we can beat the pros on the stock market? In fact, this is the wrong question as most dividend investors will answer:
I don’t mind the market, I just mind the dividend payments I receive each month
All right, but why do you care to manage your portfolio if someone else, a professional, can do it through a dividend mutual fund or a dividend oriented ETF? Just for fun, I used a fund screener to find dividend mutual funds showing the following metrics:
Dividend yield between 3% and 5%
3r annualized return over 10%
5yr annualize return over 10%
The research I completed was on both the US and Canadian markets. Can you believe I found 99 funds? Here’s the list if you want to take a look:
Click Here To Download the Chart in PDF (free!)
Forget about the fees you pay, there are plenty of dividend mutual funds paying you a great dividend with performance as well. So what is the point of investing on your own when you could simply do a little research, select a solid fund and invest all your money in it. This would take a few hours to find the fund and you would be set for the rest of your life. There must be something else… This is why I started to list the reason why I invest on my own.
#1 I’m passionate about finance
Each morning, I’m eager to read the business section of my favorite newspaper. I love talking about finance with friends and family and even studied in this field. Investing is not only a process for me, it’s a hobby. I like searching for new companies, learning about their business models and finding out more about my next stock pick. I would be sad if I couldn’t do it.
#2 I like having control over my stuff
If there is one thing I hate, it is when I have no control over something. I like to take responsibility and this is why I manage my portfolio. Buying a mutual fund or buying an ETF would take away all my control over my portfolio. I don’t pretend I can beat the market all the time, but I like to control my portfolio even if it means making a lower return. So far, I can’t say many managers would beat my portfolio since I started my dividend growth investing journey.
#3 I like to feel the dividend increase
I started to move my portfolio towards dividend growth stocks in 2010 and completed the process in 2012. Here how my dividend payment increased during those years:
During the past 5 years, my dividend income increased by 350% while I added only 11K in my account (which is about 30% of my amount invested in 2011). I like to see this progression. Even though my savings ability hasn’t been the most impressive in the past 5 years, my dividend income growth rate is phenomenal.
#4 I feel I can beat the pros
Yes… I’ll admit it, if I felt I wouldn’t be a match for the pros, I would probably not invest money in the stock market by myself. However, when I look at my returns since I started to apply my 7 investing principles, I do beat both markets and most pros. This makes me proud but I know that 4-5 years is nothing in an investor’s life… especially when you invest in a bull market. Times will tell me if I was right, but so far so good!
There is also another reason why I think I can beat the professional over the long run. Portfolio managers might be the most qualified on earth, and they are human. They make a lot of money doing their job, but they are under lots of pressure. Sometimes, you get to a point where you would rather save your job than try to do it well. This happens during market turmoil; portfolio managers may tend to concentrate on their job as they are worried about losing it.
I know for a fact that I don’t fear losing money on the stock market. I’ve experienced 2008 and didn’t budge. I know I won’t during the next crash!
Why do you invest on your own?
I’ll be honest; I don’t expect you to tell me you believe you can beat the market. I don’t think this is the reason why you are a DIY investor. This is why I’m asking you; why do you invest on your own? Why do you spend your precious time doing something a professional could do for you? I’m pretty sure you have a good reason and I’d like to know about it!
It’s a question of trust. I trust no one except myself to handle my hard earned money. So, I had to learn! Luckily, dividend growth invention is not hard.
Hahaha! Good one Michel!
You are right, everything around personal finance is all about trust. It’s hard to trust someone else to manage your future.
Cheers,
Mike
I don’t like the idea of a fund manager getting a bonus for his performance during the quarter with my money
I invest in order to reach my goals and objectives. My goal is to be able to live off dividends in retirement/FI/ whatever you want to call it. I have been following my plan for 8 years, and can cover anywhere between 60% – 80% of expenses with dividends today. Will cover 100% after 2018.
If I follow my plan and end up with $10 million at the age of 80, that generates $30,000 – $35,000 in monthly dividend income, then what difference does it make if I could have had a net worth of $12 million or $8 million with say index funds?
I don’t invest with the goal of beating anyone 😉
Hey DGI,
Interesting perspective, I’m pretty sure many investors feel the same : “as long as I reach my objective”. I guess it would not make any difference if your account show 8 or 10M$, but it will if it shows 500K instead of 1M$ 😉
Cheers,
Mike
There is always someone who is getting richer than you.
If after 30 – 40 – 50 years of saving and investing, at age 80, I have a choice in NW between $500K and $1M, I would be deeply disappointed in myself.
OK, then what about you are at 8M$ and if you had invested in funds you would be at 20M$?
(assuming that over 80% of DIY investors make a lot less than fund managers over a long period of investment).
🙂
I trust my method, and have been doing it for 8 years.
If you don’t trust your method Mike, you should just sell your dividend stocks and buy index funds. There is no shame in that.
The real problem with your question is that you don’t know whether I will have 8 or 20 million in the future. You won’t know until 30 – 40 years from now. By that time, it will be too late. So your question offers nothing actionable for me. It just tries to make me question myself, and want me to jump strategies frequently – i am seasoned enough to know that this is a mistake.
I do know for a fact that if I had $8M, and needed $1M or less, I would not give a damn whether someone else had $20M or $100M. It makes no difference to me whether some other method would have made me more obscenely richer than mine. If you suffer from envy, you will always switch strategies, and never really accumulate real wealth. And if $8M is not enough, and you lust for more, then you will never really be financially free.
Hey DGI,
In fact, if it takes you 30 years to realize something, you are a bit late for everything. You shouldn’t need more than 5-6 years to realize that what you are doing is right or wrong. And that is good not only with investment, but with pretty much everything you do in life.
I understand your point that as long as you achieve your goal, you don’t mind if there was a better way to reach it. On the other side, not asking yourself if there is a better way to do things may cost you a lot. Imagine if you can reach financial independence 10 years faster by doing things different?
I don’t doubt my strategy and I hope you don’t take 30 years to realize stuff 😉
Hi Mike,
I understand your point pretty well. The question is that of opportunity cost. I am afraid you didn’t understand my point at all however. This is troubling.
The advantage that I have is that I can afford to be patient, and not worry about fluctuations. This is what my comment meant. I thought this is understood, but if not, I am spelling it out. Professional investors are evaluated based on monthly, quarterly, results, which are random noise. Even year to year results are noise. I can ignore noise, and focus on long term fundamentals.
I believe dividend growth stocks are a great way to build wealth and income.
The example you provided doesn’t add any value – and that’s because a diversified portfolio of dividend growth stocks will likely deliver a total return that is similar to say S&P 500. I don’t know what the future holds however, and neither do you. I do know that if you switch strategies frequently because you chase returns, you will not accumulate a sufficient nest egg for your retirement.
In fact, most people who just invest in funds, don’t just hold US stocks like S&P 500. They hold a bunch of bonds, international stocks, and a bunch of assets that they hold for the sake of owning a bunch of assets. Most people that switch to indexing do so because they chase performance – this is why so many new US index investors simply hold a large allocation to US indexes, and not international indexes or bonds. A few years ago many were chasing international stocks because of their past performance.
A portfolio of US dividend growth stocks would have done much better than most mutual fund investors in the past 8 years. But noone knows future returns will be – thats a fact. So I try to control things that are within my control.
I can control my savings rate, and investments I make, but not investment returns. So I focus on that.
Hope that clarifies it.
Thx for the additional comment DGI.
I agree with you; switching strategies all the time to follow the trend is the best way to lose money on the stock market (or make less). I was more referring to sticking to the same strategy but paying someone else to do it instead of doing it yourself. I read your blog and I know you have a solid investment process, however, you must agree with me that it is not the case of many DIY investors.
Cheers,
Mike
I do my own investing, because:
I would rather make my own mistakes than PAY a fund manager to make mistakes with MY money.
Also, I think my yield can do better than a manager’s yield, after fees.
Bram
I agree with you Bram; I like making my own mistakes too! The accountability level is definitely different for a fund manager.
Cheers,
Mike
Interesting thoughts Mike. I invest our capital because I feel I have two advantages over the professional investor.
1. I can take the long term approach to investing, rather than needing to beat a given index each and every quarter.
2. I don’t feel like I HAVE to do anything. Fund managers keep must put the capital they receive to work. Therefore, I contend, it is likely to be misallocated. I never feel like I MUST invest all of our capital. Sometime, I think the best thing to do is…..well nothing. In the current market environment, that’s how I feel. “Don’t do nothing, just stand there!”
-Bryan
Hey Bryan,
you bring a good point: fund managers “have” to do something with you money and this is not always the good decision!
The main reasons that I invest myself are
the learning part: study and understand the different styles and select one that fits my goal and character
It is fun, it challenges me. It can be done everywhere.