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You see people such as stockbrokers and fund managers are now under a lot more pressure from the popularity of index funds and ETFs — exchange traded funds. Both of these forms of broad market investments take away the need for intimate market or company knowledge and are relatively low cost.

They also can give you an entire exposure to the whole market — say the S&P/ASX 200 — which means when you are driving home in the car after work and the radio finance guy or gal says “the S&P/ASX 200 was up two per cent today”, well you are about two per cent richer. And if the market is up 25 per cent for the year, then your wealth exposed to this product has grown by close to 25 per cent, deducting the pretty small costs.

Ups and downs

Now, as last year was a big market-rise year with the overall market index up around 34 per cent, an ETF or index fund exposed to the broader market would have gone gangbusters for your portfolio’s value. On the other hand, in 2008 these products could have cut your nest egg in half! Don’t ever look at investments through rose coloured glasses.

Given that the market rose by around 34 per cent in 2009, then it’s logical that this year will deliver a much smaller rise for the broad market indexes. And this is why fund managers and brokers will say that this year it’s right to pick companies that will outperform the market index’s rise.

History shows…

But the next big question is, what companies or funds do you go for?

History shows that average fund managers, and therefore individual investors, using a broker do not outperform the index. However, this ignores the fact that above-average fund managers can beat the index, but who are these people?

History again shows that few above-average fund managers remain that way and so you can get lucky for two or three years but then your genius fund manager can come a cropper!

Do the research

This can be the value of a really savvy adviser and that’s why some advisers get a big following, but it still suggests that it’s hard to beat the index.

Some advisers will get a broad exposure to the market through an index fund but also try to get extra grunt by going for a small cap fund where the fund manager has a knack for seeing great companies that are undervalued. This is called a bottoms-up approach, where the fund manager gets to know the business before he buys the company’s shares.

All up, investment can be pretty challenging and that’s why reading columns like this one (and I guess others) will help you make better decisions in the future.