Investment Planning – Seeing the wood for the trees

I was looking at the total return performance of the IMA UK All Companies Sector and found that the average fund has grown by 307.64% over 20 years. Despite the fact that this performance is flattered by survivorship bias (the performance of funds that have closed down or merged have been removed) it was beaten handsomely by the FTSE ALL SHARE Total Return index which stood at 369.91%.

In addition this average is bolstered by the better performing index trackers within the sector average calculation.  This leaves plenty of extra performance headroom for a low cost FTSE ALL SHARE tracker (charges/ tracking error of say 0.25% per annum) to significantly beat the average and at the same time this additional performance would have been achieved with less risk along the way.

Seeing the wood for the trees in the active vs tracker debate is recognising that there is no mechanism for consistently selecting the winners of tomorrow never mind in 20 years’ time today. You can of course try and there are plenty of active managers supported by their slick marketing departments who will make you feel that they are the ones to beat the market!

Alternatively you can “play the percentage game” (a bit boring I would agree!) and buy a tracker fund in the full knowledge that you have better odds of beating the sector average than an active fund and with potentially less risk too!

I know which one I would choose which is why it forms the basis of my investment philosophy I use in client portfolios.

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