For most people, I recommend investing in low-cost, index-based managed funds. The principle is that you shouldn't focus on beating the market - you should just make sure the market doesn't beat you.
If you're investing for the long-term, one of the beauties of this investment strategy is that you can essentially set and forget. Just keep the investments there, contribute to your investments, and focus on more important things in life.
For the most part, external factors like "the market" shouldn't influence your plan. You should only update their plan if it is a result of a change in your circumstances, needs, and objectives.
I specifically tell people NOT to look at how their investments are doing on a daily, weekly, or monthly, basis. Investments will go up and down. The more regularly they check, the more likely it is they'll see their investment going down. The less often they check, the more likely they'll be pleasantly surprised when they review their situation.
Sometimes, the person I'm advising isn't very satisfied with this.
And frankly, there are times when I'm not satisfied by this.
If anything, it's boring. And it would be nice to give more detailed advice - even to better justify the cost they are paying for my advice. (Although I can usually justify my cost by pointing out the substantial fee savings they receive from adopting this strategy.)
Hand on heart, however, this is almost always the best advice. And, like I often say, if your investment strategy isn't boring, then that's probably a red flag.
Does this mean that it's impossible to get better-than-market returns?
No. You can get better-than-market returns.
Examples abound of people who make huge returns on their investments.
You're not going to become the next Bill Gates or Mark Zuckerberg by squirrelling your savings into low-cost, index-based funds. You won't get onto the Rich List. You probably won't even end up as the wealthiest person from your high school.
It's worth acknowledging this, and pointing out some things to keep in mind if you want to generate a better-than-market return.
- Some people generate significant returns from real estate. If you're going to pursue this route, there are two things to keep in mind: (1) You're taking on a lot of risk - you're likely buying undiversified, illiquid assets, and gearing to boot. There's a chance you'll lose money - and possibly a lot of it. If you generate a return, it should be a better-than-market return, because you need to be compensated for the risk. (2) Make sure you put in the time to research the investment, and do everything you can to maximise the prospective returns and minimise your returns. If you're not prepared to at least read a few books on real estate and build relationships with professionals who know what they're talking about, then it's probably not for you.
- One of the best ways to make a better-than-market return is to invest in yourself. Invest in your career. Invest your time, invest your resources, and be strategic - sometimes the best opportunities over the long-run are the opportunities that require you to make trade-offs in the short- to medium-term.
- Another way to make a better-than-market return is to invest in a business. And the best way to maximise your return and minimise your risk is to treat that investment in the most professional manner possible. In other words, this isn't a game, or a hobby. You need to work on it with the same diligence and commitment as you do to tasks in your professional life.
This isn't suitable for most people. Business can be risky. It can be time-consuming. It almost never works out how you expect it to.
You might end up way ahead. You might not.
Take my business, for example. If I look at it in a purely objective light, to date I've lost money compared to where I'd be if I'd stayed in a normal employment role. I've foregone a lot of income to pursue this venture.
Maybe the business won't be as successful as I hope or expect it to be. Maybe I'll end up losing money. This is common. It's one of the things that you need to recognise when you look for outsize gains - there is usually a high chance that you'll lose a substantial portion, if not all, of the money you put into it. This is much more likely to be the case than when you invest in a diversified portfolio of financial assets.
BUT. I'm confident that if I play the long game, I will get a return on my investment. At some point in the future, I will generate more income than my expenses. I will also generate more income than I would have by working for a salary - especially when adjusting for the flexibility of being self-employed. At some point, the excess income will more than make up for the losses I've incurred so far. The return on my investment will be far above what I've initially put in. And of course, there are various non-monetary rewards as well.
I'm also aware that even if my business doesn't work in its current iteration, there are other benefits I'll have received. This includes a better media profile. I've published a few books. I've developed contacts I wouldn't otherwise have. As well as looking at the upside, I've been managing the downside risks as well.
I use my personal situation not to be self-promotional, but to provide an illustration where the outcome is very uncertain. I've invested money, and there have been opportunity costs, and I hope to get a return for what I've put in. I hope that return is better than the return I would have received by investing in low-cost, index-based managed funds. There is a good chance I won't get a return. But there is also a chance that it will be very lucrative.
The only way to make this investment generate a return is by treating it in the most professional way possible, with a whole lot of diligence and commitment, and a keen appreciation of the time and risks involved.
Just like any other active investment where you want to generate better-than-market returns.