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Beat The Market With Just Two Shares

moneyWouldn’t it be great if you could beat the market with just two shares? Truth is, you could, if you wanted, beat the market with just one share. That is provided you are willing to bet the farm on a single winning stock.

But, I suspect, most of us would admit that would be quite a risky strategy, which is why diversifying your portfolio helps to spread the risk by investing in a number of different shares.

However, looking after a wide number of shares can take time, which is something that many of us may not have. So, how can you possibly beat the market with both wide diversification and cutting the number of shares you are managing at the same time?

Allow me to introduce my colleague Stuart Watson from The Motley Fool UK who introduced me to the concept of “Indexing Plus A Few”. He came across the idea from Matt Richey of Fool.com. That, by the way, is how we work here at The Motley Fool – We are regularly sharing investing idea to help you invest better. And Stuart’s idea is so elegantly simple that I want to share it with you here.

As the name suggests, the majority of a portfolio is invested in index trackers, say around 80%, while the remainder is put into as few as one or two select companies.

So, here in Singapore, a large chunk of your portfolio might be invested in the SPDR Straits Times Index ETF (SGX: ES3) or the iShares MSCI Singapore Index Fund (SGX: I19). The index trackers aim to mimic the performance of the Singapore market by investing in popular blue chips such as Singapore Telecoms (SGX: Z78) and DBS Group Holdings (SGX: D05).

The beauty of the technique is that rather than selecting up to a dozen different stocks, all of which will have varying attractions, you can now focus on your best prospects. These may be down in the mid-caps or small caps that might have a better chance of doubling within three to five years through a combination of profit growth and higher rating.

Of course, unless you’re an ace stock picker or one that is exceptionally lucky, you are never going to shoot the lights out. In reality, though, you don’t really need to. You should probably aim to outpace the market by just a couple of per cent a year. That may not sound like much, but it builds up over the long term. For instance, $10,000 invested at 8% for 25 years gives you $68,500. But if you manage a return of 10%, your final amount increases to $108,300.

But let’s say you are a terrible stock picker – someone who couldn’t hit a barn door with a banjo. Well, this approach limits any damage you can do to your portfolio. Given that you are choosing only a few investments, it’s a lot easier to find out where you might have gone wrong. It also means less transaction charges. And if you find that you are not beating the market after a few years, you can always pile the whole lot into the trackers.

Here at The Motley Fool we believe that investing should be fun. Our purpose is to help the world invest, better.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.