The best investor profile is the dead investor.
Let’s explain better
An investor profile defines an individual’s preferences in investment decisions, for example:
- short-term trading (active management) or long-term holding (buy and hold)
- Risk-averse or risk tolerant / seeker
- All asset classes or just one (shares for example)
Before we move on, let’s divide your financially conscious life into a few ages:
- The first investment period: You have savings and you want to start investing them and you don’t know how, on what, when, what to do if you lose money, …
- The age of income (or accumulation): You are investing and you are still earning a salary, you are saving and you want to invest what is left over each month (or spend what is left after the investments).
- The transitional age: Your investments are producing enough money, but you are not FI yet. You may want to take a gap year, switch to part-time, take some risks in new businesses or careers, or just pursue your passions being aware that this could reduce your earnings. Here you can probably manage to keep your expenses below your earnings, but you won’t be investing much more.
- The age of retirement: You are living off your investments, you are FI (and retired). You have to continually withdraw to meet your expenses.
In this blog we are looking at how to get the best possible return from the market with the least amount of effort.
I am a dead investor
My strategy is mainly based on buy & hold and sees the desire to buy and keep a portfolio for the duration of the ages described above.
Why Dead Investor?
The day trader’s job is to beat the market and perform better than average. The buy & hold investor agrees with the market correspondence. The former is driven by short-term gains, while the latter prefers to play long-term.
Introduce the concept of Alpha
Alpha (α) is a term used in investing to describe an investment strategy’s ability to beat the market.
Regardless of how much information an investor has access to, she or he can realize an alpha of zero by holding the market portfolio.
If all investors have the market so no one can obtain an alpha than the market.
If no investor earns a negative alpha, then no investor can earn a positive alpha, and the market portfolio must be efficient.
The market portfolio can be inefficient only if a significant number of investors either:
- Misinterpret information and believe they are earning a positive alpha when they are actually earning a negative alpha, or
- Care about aspects of their portfolios other than expected return and volatility, and so are willing to hold inefficient portfolios of securities.
Numerous studies report that the actual alpha (net of fees) to investors of the average mutual fund is negative.
Funds are active investors and have more information than a retail investor. On average they lose value as a result we don’t want to be active investors.
Better be a dead investor and keep what you buy.
P.S. Of course, the portfolio must be suitable for all the economic scenarios we have seen recently.