Last week, I discussed how beating the market is hard to do. I wrote the commentary to provoke an awareness of the challenge that faces anyone pursuing an active strategy. Bluntly put, if you try to handpick investments without a disciplined, rational, well-thought-out plan for doing so, (barring really good luck) you will underperform.
A task that is hard is not one that is impossible. Individual investors can do better than the S&P 500. Today, I’m going to give guidance on how. It will be guidance that applies to a wide variety of specific approaches, including value, growth and technical analysis. I’m going to intentionally keep the guidance broad for an important reason: Regardless of the investing style you like to follow, the overarching rules for success don’t change.
Rule 1: The optimal strategy is not one that maximizes return, but rather one that helps you stick to your long-term investing plan and achieve your goals. Big returns always sound enticing. Pitched by someone with a charismatic personality, a high-return strategy sounds even better. But if you can’t stick to the strategy because of its complexity, the volatility it incurs, the time commitment it requires, the number of transactions associated with it, your interest level or any other reason, then it’s not an optimal strategy for you. If you are unwilling to or can’t stick with a strategy, don’t use it.