Well Well Well
Jul 06, 2024
The finance industry speaks constantly about buy and hold investing as a core part of investment success, but spends most of its time shilling the latest hot stock or raising funds so to generate more fees.
Witness the constant flow of new opportunities and ideas. Themes such as AI or Lithium, single stocks like Nvidea or the latest incarnation of ETFs are promoted as long-term opportunities. A friend who doesn’t normally invest moved to Western Australia and then wrote to me at the height of the lithium boom asking what I thought of a particular lithium company. At the time many stock analysts were promoting lithium as a long-term opportunity for investors. I replied that I thought she would be better off long-term putting her money in an index ETF and adding to it periodically. While it is not exactly long term, lithium stocks since then have fallen a lot.
A majority of superannuation is managed by ‘professionals’ who promote buy and hold. But they don’t manage a portfolio in the same way. If they did, we wouldn’t have market crashes because in buy and hold you are not supposed to sell and when they get nervous, they sell. They all follow each other and hence why we get market crashes.
When it comes to managing a super portfolio over 30 years, the probability that your individual stock selections will deliver long term outperformance is extremely low. Understanding a little statistics and probabilities can show you just how difficult it is. If you want to select individual stocks or thematic ETFs, think about how successful you will be selecting, say, 300 of them over 30 years. I can show you research which demonstrates the odds are so low that most investors shouldn’t and wouldn't bother.
We know over 30 years or so, there is an extremely small chance of picking a long term outperformed such as Apple or Amazon, or in Australia, Fortescue Metals. These rarities take up a lot of media and also generate false hope that most of us can select them and ride the wave.
Our Well 3 program is a simple ETF based systematic approach to managing a portfolio of time - a long time. We don’t rely on picking winners, but use our 8 principles to show how a systematic approach can deliver outperformance over the long term. The bonus is saving you a mountain of fees generated by the fund managers in their own interest.
With a dash of statistics, you can see that all these hot ideas fade over time, they all mean revert and, in the end, deliver returns that in most cases are average, thus showing there is no long-term benefit from stock selection.
Many people get seduced by complexity and action when in fact the best portfolios are boring, simple and low maintenance.
While you can't get superior performance by stock selection, you can get better performance by the way you manage your portfolio. We use our understanding of markets to develop a simple, yet effective portfolio by simply holding a representative cohort of ETFs and use our 8 principles to manage the portfolio over time.
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