Investing Success: Just Plain Luck?

 

In this post, we will access if our DIY approach is doing better than indexing in the long run. We will also try to determine to what it can be mainly attributed.

 

Many assume it can only be plain luck. They think DIY investors aka stock pickers can only beat indexing if they are lucky. Lucky to identify and cash in on big winners or to avoid big losses or even both.

 

In the end, the big question boils down to knowing if DIY Investing is worth the trouble?

 

We’ll have a look at our own investing situation to have a better idea.

 

To be clear, indexing is probably a better approach for most people. But we are trying to verify what’s better for us and it definitely may not be better for you.

 

Why Did We Get into DIY Investing?

 

Let’s get back to why we got into DIY investing in the first place.

 

Our initial DIY assumptions were to try to obtain similar capital returns (8%) as our expensive-on-fees mutual funds (indexing was not that accessible yet in those days) but to do a little better on dividends (4% instead of 3%) and fees (almost zero versus 2%). Here, we’ll note that indexing solutions, with fees around 0.5% or even under, are now quite easy to find. In that context, indexing is already much better than archaic mutual funds.

 

From the start, our overall objective was to make 12% long-term (8% capital + 4% dividends + 0% fees) instead of 9% with our old-fashioned funds (8% capital + 3% dividends - 2% fees).

 

In fact, doing 2-3% better seemed to be worth the hassle for us.

Keep Saving and Investing Simple

In this day an age, we have access to an impressive variety of financial products. It sometimes feels like every time you blink, the financial industry comes up with a new gimmick promising you to astonishingly make your money grow faster or to protect it from any danger.

But, as we will explain today and contrary to what many suppose, you probably can successfully save and invest simply understanding just three main financial vehicles. 

No Need to Become a Financial Wizard Capable of Grasping Every Intricacy

For most people, all that financial mumbo jumbo can be overwhelming and apart from inevitable death, the only thing guaranteed is probably that they, the financial institutions, will make a big chunk of money selling these. And most of the time, it will be at the expense of the consumer…the ever poor consumer.

On top of it, almost nobody really has spare time to manage and invest money during busy workdays. And we are not even talking about developing the necessary skills to do so.

Using Popular Funds as Portfolio Benchmarks

Before my days as a DIY investor, I mainly invested my money thru mutual funds and Exchange-Traded Funds (ETFs).

Back then, as a Canadian, some of my popular choices included XIU (iShares S&P/TSX 60 Index ETF) and RBF266 (RBC Canadian Dividend Fund) as I already was leaning toward dividend investing.

I now use these two funds as benchmarks to measure my performance as an investor.

Be careful here, I’m not advertising or promoting these two particular funds in any way. You should rather view them as examples or as proper representatives of their asset class. Many other funds could have been used and the illustration would have probably been pretty similar.

Some of you might think that beating these funds does not represent much of a challenge and that they constitute a pretty poor standards.

Avoid Over-Diversifying Your Mutual Funds

While investing in mutual funds, do not diversify too much.

Already Diversified Enough

By definition, a mutual fund is already diversified!

Indeed, the fund manager buys different titles with money invested by all shareholders of the fund.

Some specialized funds are a little less diversified but in general, mutual funds are a well diversified investment vehicle.

Limit Yourself to a Couple Funds

It is not necessary to select a large number of funds for your portfolio. Three or four different funds should be sufficient to meet your needs. In some cases, a single fund may do a great job.