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Why beating the market isn’t impossible

Tristan Harrison

If you gave every adult in Australia $10,000 to invest into ASX shares then I’m sure a large majority of them would underperform the index. For most people, I think the best thing to do is to invest in a very-low-cost index fund like Vanguard MSCI Index International Shares ETF(ASX: VGS) and hold for the long-term.

According to the accepted knowledge, a lot of those people would actually do better than people who invest with professional investors. A lot of those professionals supposedly underperform and charge high fees. It’s a clear win for the index. Case closed.

But, I don’t think it’s that simple. A lot of those studies are done on American investors. Everything about the American share market suffers a lot more from short-termism than here. Businesses report every quarter in the US, investors expect a better result every 90 days.

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It’s impossible to know what a share price will do over the next year, let alone the next three months. You can give yourself a good margin of safety, but that’s no guarantee.

Plus, it’s quite hard to outperform the index when the biggest constituents are actually some of the best growth shares in the world like Facebook, Alphabet and Amazon.

However, I don’t think “professionals underperform the market” is as true in Australia. Australian management fees are, on average, quite a bit lower. Our index isn’t full of wonderful large growing businesses either.

I believe it would be a relatively poor choice to invest in the Australian index. It’s full of slow-growing businesses that have reached maturity and serve a very small population.

To truly get a sense of a investor’s performance I think you need to look at least at a three to five year period. When you invest for at least that amount of time it becomes a lot easier to outperform.

For my own portfolio, I believe that a group of quality businesses like InvoCare Limited(ASX: IVC), Challenger Ltd (ASX: CGF), Ramsay Health Care Limited(ASX: RHC), Altium Limited(ASX: ALU) and Bapcor Ltd(ASX: BAP) will outperform the Australian index. I just need to be patient and let those businesses do their thing.

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Foolish takeaway

So why not just invest in an international index? I do regularly write about how international indexes would be a good investment option. But, taxation makes it easier to outperform in Australia. Franking credits are an underrated part of Australian returns and you often have tax withheld from foreign dividends too. The extra few percentage points that franking adds to our returns add up over the years.

Motley Fool contributor Tristan Harrison owns shares of Altium, Bapcor, Challenger Limited, InvoCare Limited, and Ramsay Health Care Limited. The Motley Fool Australia owns shares of and has recommended Bapcor and Challenger Limited. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Ramsay Health Care Limited and Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.