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What Type of Investors Perform Best?

May 14th, 2015 by 
PK

As we're discussed before, there are many types of investors - and you can summarize them all with four main categories.  Today, let's say you were characterizing investor types from how they behaved with their own portfolio.  If that's the case, which investor types do you think had the best performance?

According to an internal study at Fidelity, and reported on second hand during Bloomberg Radio's Masters in Business podcast, a hilarious answer to that general question was given by guest James O’Shaughnessy: the best performing accounts held at Fidelity were the ones held by people who forgot they had an account.

Think about that: there wasn't a demographic that could beat the returns of people who literally took the old adage of "set it and forget it" to heart.

Active Management, Passive Management, or Fuhgeddaboudit?

The financial writing sphere is full of advice from folks who claim to have the key to investment success... often with hard to verify details (or 6-12 month track records).

And while the Finance and Personal Finance realms are nice to wade into in order to take control of your spending, debt, and wealth accumulation along with setting up an investment strategy, strangely it's the folks who then walk away from the investment strategy that do best.

So, maybe an ideal strategy for getting a hold of Personal Finance is to first get a hold of your debt and spending, get your savings in line, set up your investments... and go do something, anything else... other than concentrating on your investments.

A picture of a man who lost his head, one of the investor types

Investor types?  Where do the headless fit in?

Typical Investor Types?

Here's the thing: for all of our movements trying to outsmart the stock market, we're (the royal we) really not that good at it... indexes themselves don't churn that often and do pretty well on their own!

As you know from our S&P 500 Dividend Reinvested Return calculator, the S&P 500 has historically returned a quality amount over long enough time periods.  If you want to capture the returns of an index, all you need to do is find a fund tracking the index with as small of a fee as possible - and walk away.

Now, due to fees, taxes, slippage and all sorts of reasons you can't match the exact results shown in the calculator.  Some brokerages do allow free reinvestment of dividends and an IRA or 401(k) could shield the return for tax purposes, but you'd still have to pay the management fee on the fund (we don't have to worry about the 'Dollar Cost Averaging' or 'sequence of returns' risk here - remember, this article is about forgotten accounts).

Still, that's just a rounding error over a long enough period.  You would've beat the vast majority of investors by forgetting about your S&P investment 20 years ago and only checking today.  Isn't that a funny thought?

Now that's a strategy I can get behind.  And forget.

So, there you have it: the investor types best suited to beat the majority of investors are the ones who forget they're even invested.  How do I invest in them?

Don't Quit Your Day Job...

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