Should I listen to stock tips? Hell, no!!
You would have heard me say it a hundred times, “for your everyday investor, trying to beat the market just isn’t worth your while”.
Why do I say this?
- The average investor can’t time the market
- The average investor can’t beat the market (and if you can, it might only be worth 80p per hour)
- Private investors historically buy high and sell low
But, moneystepper, you are saying “average investors”. What if I’m above average? What if I am…AN EXPERT!
Well, I’ll probably still tell you the same thing, and here is why…
At the beginning of every year, all newspapers across the world consult their “stock market experts” in order to get there best stock market tip for the coming year.
In 2014, these were phrased as follows:
The Guardian – 31 Dec 2013 – “our business writers explain their share tips for the year ahead… a mix of companies we believe should do well in the months ahead.”
The Telegraph – 23 Jan 2014 – “One of Britain’s best performing fund managers, Giles Hargreaves, who runs Marborough Special Situations, names his five Aim share tips for 2014… shares listed on London’s junior stock market to deliver the goods in 2014.”
The Daily Mail (This Is Money) – 29 Dec 2013 – “With the UK economy resurgent, many expect the FTSE to go above 7,000 next year. UBS is one of the more bullish houses and sees the blue-chip index hitting 7,400 by this time next year, which would represent a rise of around 13 per cent. In the hope of outperforming this rising market, here are our stock picks for 2014.”
The “business writers” at the Guardian want to “do well”: nicely understated, most Guardian like indeed.
The “best performing fund manager” working with The Telegraph wants to “deliver the goods”: a bit more like an advert.
The Daily Mail notes the “resurgent” UK economy, “bullish houses” and “hitting” new highs. And, they are going to outperform all of that. As ever, very choice language from The Daily Mail…
What would we suggest?
As you will find in all our articles, we suggest that the average investor in the stock markets buys a well-diversified low-fee market tracking ETF.
So, how are these experts doing?
Well, let’s have a look shall we. Imagine we have our £15,000 NISA allowance to invest, and we MUST invest it all on 01/01.
Moneystepper would have used the £15,000 buy a world index ETF with Vanguard (Ticker: VHYL).
For “the experts”, we shall use the first five suggestions in each of the linked articles above, investing £1000 in each of the fifteen total companies.
As per the close of the markets on 05/09/2014, here is how we are faring:
* Price is taken from 01/01, other than for The Telegraph as these picks were published on 23/01.
** Purchased by BMS. Cash value is takeover price, assuming we sell our shares in BMS on date of takeover.
There are a lot of numbers to take in there. Let’s summarize it a little.
The Guardian: £5,000 invested would leave us today with £4,858.44 (including dividends) for a total annualized return of negative 3.8%.
The Telegraph: £5,000 invested would leave us today with £4,254.28 (including dividends) for a total annualized return of negative 19.9%.
The Daily Mail: £5,000 invested would leave us today with £4,897.13 (including dividends) for a total annualized return of negative 2.7%.
Total: £15,000 invested would leave us today with £14,009.85 (including dividends) for a total annualized return of negative 8.8%.
In comparison, £15,000 invested in the world market ETF would leave us today with £16,319.12 (including dividends) for a total annualized return of positive 11.7%.
It doesn’t end there: what about fees?
Excellent point! Imagine we are working with a discount broker service online – say SVS securities – which charges £5.75 per trade.
Therefore, with the moneystepper ETF option, we would incur one single fee of £5.75.
However, with the “stock tips” advice, we would have to buy 15 different shares, and therefore fees of £86.25.
This might not seem like much, but it represents 0.6% of our original investment. Therefore, our annualized negative return (with fees) is actually 9.4% for the stock picks.
It doesn’t end there: what about managing your investment?
Another good point, well made!
In our ETF investment, we put our money in, reinvest our dividends, forget about it for 30 years and we’ll be okay.
However, due to the impact of “company risk” this can’t be said for the stock picks from the newspapers. Instead, we need to invest time in the future constantly evaluating these individual companies for changes in performance, personnel, financing, market sentiment, dividend policy, etc.
As the old adage goes: “time is money”. Use your time (and your money) wisely.
Maybe they are just having a bad year?
Are we just being selective and harsh on these stock pickers? I don’t think so, no.
We have randomly selected their first 5 picks from the articles and the comparison is an actual diversified ETF which makes up a good chunk of my personal investment portfolio.
But, maybe these stock pickers are just having a bad year. Wouldn’t it be fairer to see how they did in 2013 as well? Here are the performance of the first five picks from 2013 from each of the papers:
Credit seemingly must go to The Telegraph, but this only averages out the 19% losses they have noted this year. You can see that 2014 isn’t a one-off. I’m afraid, it is the norm!
“Stock picks” are primarily designed to help sell newspapers. They are not designed to help you benefit financially in the long term. At best, they are a lottery.
Our advice: just turn to the next page of the newspaper or to the next website. Ignore them. Buy diversified, low-fee market tracking ETFs and get on with enjoying your life (safe in the knowledge that you are probably beating those “experts” anyway).