Academic evidence tells us that owning part of the Vanguard ASX 300 ETF (ASX: VAS) and/or Vanguard MSCI Index International Shares (Hedged) ETF (ASX: VGAD) is the best way to invest.
What is underperformance?
If investing in shares isn’t your thing (e.g. “they are too risky”, “I can’t be bothered”) you might be surprised to know that you don’t need to ‘pick stocks’ to be more successful than 80% of professional stock pickers.
Underperformance occurs when you buy investments which perform worse than ‘the market average’, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) if you’re investing in Australia.
For example, your investment portfolio returns 10% in a year but the ‘market’ goes up 12%. That’s 2% underperformance.
Why is underperformance such a big deal?
Underperforming the market over many years is a big deal because it means you will retire with less than someone who has performed ‘average’. Even 1% or 2% underperformance can result in tragically different outcomes once you hit retirement. Over 20 years, for example, the difference between a 9% average return per year and 10% average return per year is around 20% less. That is, a 1% drop in returns per year is 20% less at retirement.
But here’s the important part: locking in an ‘average’ return could be the best and cheapest investment an ASX investor will ever make.
By investing in an index fund ETF like Vanguard’s ASX 300 ETF or International Shares ETF — which cost just 0.14% and 0.21% per year, respectively, to manage — you will get the market/index’s return.
The ETFs are designed to track the market average. Simple as that. Vanguard has computers which take investors’ money and put it straight into the ETF.
Is ASX share market investing a waste of time?
Over time, research has shown that professional stock pickers have a poor track record when its comes to outperforming the market. Depending on the research and data, it is estimated that between 80% and 99% of professional investors fail to perform better than average, once their fees are taken into account.
It would seem that being able to get great investing results for a fraction of the cost of professional stock pickers is a no-brainer and the more rational thing to do. But, like dieting and exercise, people don’t always do what is rational and good for them.
For those people, it is worth the risk picking individual stocks to potentially be in the 20% of professionals that outperform the market. Admittedly, I also believe it is worth the risk if you know what you are doing.
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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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