Buying shares on the ASX has arguably never been easier, thanks to the rise of low-cost online brokerage platforms. But while buying and selling shares is a relatively painless process these days, it doesn't mean that the majority of ASX investors actually achieve decent returns.
Here on the ASX, our flagship index is the S&P/ASX 200 Index (ASX: XJO). This index represents the performance of the 200 largest ASX shares on the share market by size. If you can beat the ASX 200 consistently over a long period of time, it means you are a skilled investor. The problem is that even most professional investors can't achieve this.
Recent analysis by index provider S&P Global found that just 16.43% of actively managed funds beat the ASX 200 over the 15 years to 31 December 2022. Yep, 83.57% of managed funds underperformed the market. This doesn't bode well for the average retail investor. If full-time money managers struggle to beat a simple index fund, it's probably not too easy for the average Joe or Jane to pull it off.
It's a similar story over in the US. Our Foolish colleagues across the Pacific recently reported that the average American investor underperformed the US S&P 500 Index by almost 3% per annum over the 30 years to December 2022.
So where are ordinary investors like you or I going wrong with our investing if we are underperforming the market? Here are three possible errors that any investor could make.
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3 ASX share investing mistakes that might be holding you back
Timing the market
This is a classic mistake, yet so many of us just keep doing it. Study after study has shown that 'time in the market is better than timing the market'. But it is so tempting to try and juice our investing returns by 'buying low and selling high'. However, the reality is that the markets can (and often do) act irrationally. It is impossible to plan and prepare for irrationality, so chances are you'll eventually get burned if you try.
Warren Buffett's right-hand man, Charlie Munger, likes to say that the first rule of compounding is 'don't interrupt it unnecessarily'. Wise words indeed. Most of the time, we'd all be better off just buying a quality company and leaving it the heck alone.
Paying high fees with ASX shares
Many novice investors are tempted to outsource their investing by using managed funds, active exchange-traded funds (ETFs) or listed investment companies (LICs) to invest on their behalf. There are many quality funds on the ASX that will do a fine job, and won't charge you an arm and a leg for it. But sadly, there are others that will.
It can be hard to even find the fees that some managed funds or LICs charge you. But if you're paying someone to invest on your behalf, you'd better find out. If the annual management fee is more than 1%, chances are your returns are being kneecapped.
You might find it is better to stick with a low-cost ASX 200 index fund that charges 0.1% or less, rather than paying those exorbitant fees for a fund that might not even beat the market anyway.
Letting emotions get the best of you
It is hard not to get emotional about investing your own money. Everyone who's invested knows that awful feeling when you see the value of your portfolio tank by thousands of dollars. Emotions are the enemy of good returns on the markets.
Investing needs to be done dispassionately, with cool logic, and consistent strategy. Panic selling when markets are dropping is a sure way to dent your overall returns. As is chasing the latest hot investment and thinking you can make a quick buck.
Exuberance and panic are the two emotions that all investors need to learn to recognise, and nullify at all costs. As Warren Buffett says, good investors need the right temperament, not a high IQ.
