David Kuo: In spite of the gloom, you can beat the market

Investment Insider

If you believe everything you read and hear about Europe, then you may be forgiven for thinking that Western economies are about to be flushed down the pan.

For instance, Josef Ackermann, the chief executive officer of Deutsche Bank, reckons market conditions remind him of the 2008 financial crisis, which spawned the worst global crisis since the Depression.

The second bailout for Greece is showing signs of unravelling as the heavily indebted country struggles to bring its budget deficit under control. The US is not out of the woods either. It has cut interest rates to the bone and still the world's largest economy refuses to grow. It is little wonder that investors have lost faith in political leaders and central bankers.

It would seem on the face of it that the party is over for the West. It would also appear that many equity investors have headed to safer havens of the bullion, Swiss franc and treasury markets. Since the start of the year, the main markets in the West have fallen about 17 per cent.

But, there are some bright spots. The Dow Jones Industrial Average has lost only 3 per cent since the start of 2011 and the Nasdaq is down only about 6 per cent. In Europe, the FTSE has fared better than most markets including Germany, which has slumped 24 per cent. The UK's benchmark index has fallen 13 per cent. So to consign equities to the dustbin of despair is probably premature.

Interestingly, some shares have done remarkably well. In the Dow Jones Industrial Average, McDonald's has gained 16 per cent and IBM is 14 per cent higher.

It is not all bad news in the US financial services sector either, with American Express putting on 13 per cent in the past eight months. In the FTSE, Autonomy, which is being acquired by Hewlett-Packard, has surged 67 per cent, and chip marker ARM Holdings is up 25 per cent. Retailers Next and Burberry have year-to-date gains of 17 per cent and 13 per cent respectively, and British American Tobacco has risen 10 per cent.

There is a way to stay invested and beat the market at the same time. It's called "Beating the market with just two shares". It is a simple twin-pronged strategy. The first spike aims to match the average of a chosen index, eg, the FTSE 100. The easiest way to do this is to allocate a significant proportion of your portfolio, say, about 60 to 80 per cent, to a fund such as iShares FTSE 100. The Exchange Traded Fund matches the performance of the FTSE 100 index.

The second part, which aims to better the performance of the market, is to allocate 20 to 40 per cent of the portfolio to an individual, thoroughly researched company. The key here is to identify truly great companies that are capable of beating the market over the long term. Try this out yourself by back-testing one or two companies that you know very well. You may be pleasantly surprised at how easy it is to beat the market.

David Kuo is director of the financial advice site Fool.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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