Ugly Duckling Investing
April 17, 2007Thanks for visiting! If you like what you're reading, you may want to subscribe to my RSS feed.
We all remember that heart-breaking story about the ugly duckling not being accepted by the others in the pond only to later turn into the most beautiful swan, don’t we? What’s that got to do with finance though? Well, apparently a lot.
The article @ savingadvice.com tells you a neat little story about how people saving money aren’t really “cool” or sit in the pub together and discuss their latest achievements. But the numbers will still speak in their favour in the long run (i.e. the ugly duckling turns into the beautiful swan).
Here’s the example quoted in the article: Person A starts off with £10,000 and wants to make his money grow. But since he’s more keen to find out how to save (more) money than to learn how to maximise his return on the stock market, he chooses the easy option and puts the whole amount in an index fund tracking the (say) FTSE 100. By spending his spare time on finding ways to save money though, he is able to add another £100 a month to this fund.
Person B wants to be one of the cool guys and spents all his spare time learning about stock-picking, i.e. how to find shares that will give him an exceptional return and thus make his money work as hard as possible. He starts off investing the same £10,000 but since he doesn’t really care where his money ends up every day, there’s nothing left over to be added to his investments. All he has are the initial £10,000.
Now guess what? Assuming a steady 10% annual return from the FTSE, person A will end up with £47,555 after 10 years. If person B was good enough to beat the FTSE by 5% (a goal almost any ordinary investor would be more than happy to achieve), his £10,000 will have turned into £44,402 - more than £3,000 less than person A.
And the morale of the story? Leave the fancy shares to people who do this sort of thing professionally, look after your money and make the most of compound interest over the years. Ideally you want to save and beat the market in the long run, but very few investors actually manage to do that. Between you and me - 85% of mutual funds (who are actively managed by someone who understands the market and picks shares for a living!) underperform the market.
