Tuesday, May 02, 2006

Market outperformance - Is it all it's cracked up to be?

Is market outperformance all its' cracked up to be? This is a worthwhile question, as the markets go higher and higher.

I consider that market outperformance should be a reasonable benchmark for most investors who are in the active, self-managing, investing mode. By that, I mean investors who are dedicating a few hours per week (or more) reading about, or investigating, potential investments and markets. Even for those not spending a lot of time actively managing their investments, long-term portfolio outperformance should be possible, simply by constructing a simple portfolio that plays to both long established trends, and forward-looking trends (see recent sample portfolio over here).

But I only recommend attempting to beat the benchmark when you either have those favorable long-term trends running with you and are taking a diversified stance (see prior link), or you have a value-investing orientation, because either method (or combination thereof), will generally lower your long-term risk profile. Which is a good thing. As superinvestor Warren Buffett says, "Rule #1 is never lose your capital, and Rule #2 is never forget Rule #1".

However, I think that trying to outperform the market isn't necessarily a good thing if you are taking on risk that's significantly above what you should for your age and capital.

It's one thing for a 30 year old to invest in the high risk "latest and greatest" with some of his/her capital, but it's quite a different thing for a 60 year to speculate significant portions of capital in the hopes of beating the benchmark.

In that case, it's a particularly poor decision to try to beat the market. On the other hand, being the same 60 year old and trying to beat the market, while simultaneously achieving a lower risk profile, is a good thing.

For many investors however, given their particular temperment, retirement requirements, etc. standard market performance will do quite nicely. But for those not satisfied with the average then, market outperformance is, in my opinion, all it's cracked up to be, if done in a prudent way!


The Confused Capitalist

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