The ASX 200 has been up 33.8 per cent in the last rolling year. Extraordinary stuff. But for self-managed investors this sort of grand performance is a nuisance because when their spouse, beneficiaries or dependants hear that average return their immediate impression is that the average stock went up 33.8 per cent, most stocks went up 33.8 per cent, the portfolio should have gone up 33.8 per cent and they get the impression that replicating that performance would be pretty easy.
But it isn't because when it comes to the sharemarket, average returns hide a massive disparity in individual company share-price performances. In the last year in fact, almost amusingly, not one stock in the ASX 200 actually went up 33.8 per cent. Instead 77 stocks did worse than 33.8 per cent and 120 stocks did better. And more radically, the top 10 performing stocks went up an average 233 per cent and the bottom 10 fell an average 32 per cent. Even the top 50 stocks averaged a whopping 145 per cent and the worst 50 managed just 2 per cent. In fact nothing really came close to 33.8 per cent "except on average".
In the face of such disparate share price performance the reality is that the average performance of a 10- to 20-stock self-managed portfolio is very unlikely to match an average of the biggest 200 stocks let alone the 2178 listed stocks because 10 to 20 diverse entities are very unlikely to average the average of 200, or 2178. Most self-managed investors are no more likely to produce an average of 33.8 per cent than they are 10 per cent or 50 per cent. For self-managed portfolios the averages are as good as irrelevant.
So when your spouse next decapitates your rather fragile "investment mojo" because your self-managed super fund has failed to match an equity market expectation implanted by some major bank's economist you can tell them: "That bloke wouldn't know diddly about what I have to do every day. I'm picking stocks here and what 'the market' does is neither here nor there."
It's about stocks, not averages. It's about the stocks you choose and the trades you make. That's it, and benchmarking yourself to the averages like a fund manager will do nothing but pressure you into some very average decisions.
Comparing yourself to other investors does nothing but confuse your purpose. Professionals are concerned about their marketing departments and to adopt those influences for a 10- to 20-stock-portfolio investor, even subconsciously, is to miss the point of doing it yourself and the opportunity that it offers.
For you life is far more exciting. Pick the right 10 stocks and you can make 2.3 times your money. Pick the wrong 10 stocks and you lose 32 per cent. Or pick just one stock - you can, you know - and in the last year 180 in the ASX 200 would have earned more than money in the bank. There was a nine-in-10 chance of beating the bank, at random; 150 stocks earned over 20 per cent. You had a three-in-four chance of picking one of those, again, at random. Goodness knows what you could do with your brain engaged. Pick one of the 90 stocks that returned over 50 per cent perhaps. Or one of the 40 that returned over 100 per cent or one of the 20 that returned over 150 per cent. That was the opportunity you had doing it yourself and the opportunity you have now when doing it yourself.
So if you are managing your own portfolio and targeting an average return you are missing the point and wasting your time. The funds management industry or one of a number of listed entities could effortlessly achieve that for you. Managing your own portfolio is a marvellous, intellectual, high-stakes game. It has nothing to do with averages and it has nothing at all to do with funds management. So stop pretending. It is about picking stocks that go up. Do that or don't do it at all.
Marcus Padley is a stockbroker with Patersons Securities and author of the daily sharemarket newsletter Marcus Today.
