Your own stock index: The Do-it-Yourself Index
With Obermatt, you can run a passive stock portfolio with little effort. The advantages of a passive stock portfolio compared to an index fund are as follows:
- Transparency: You know your stocks because you have done your own research and made a conscientious choice when selecting your stocks.
- No hidden fees: Total Expense Ratio (TER) does not have to disclose all fees for funds. Trading costs, which on average account for around 1.6%, but they, in accordance with the Swiss regulator FINMA, do not have to be included in the TER which is shown in fund brochures. With your own stock portfolio, you can avoid such hidden charges.
- No overweighting of expensive stocks: An index overweighs expensive stocks by definition, because the more expensive the stock, the greater their share in the index. This means that you have more expensive shares than favorable stocks. This has a tendency to decrease your index return.
- No overweighting of large stocks: With your own portfolio, you know exactly which stocks you own. There is therefore no overweighting of large stocks, as may occur with an index fund. So they are always well diversified.
- No conflict of interests: Obermatt is independent. So the stock investment analysis and management of your money is not carried out by the same party.
- No counterparty risk: You own your shares and are independent of financial products such as funds or ETFs, which often enter counterparty risks themselves to save costs or hide additional fees.
- Lower fees: Obermatt allows you to separate your stock analysis and your stock purchase. You no longer have to deal with everything from one source. So you are investing with a discount broker which is more cost-effective in the long term.
We call it do-it-yourself indexing. The big advantage: you control when, where and how you invest your money.
Why an index fund?
Index funds and Exchange Traded Funds (ETFs) are common investing products which are typically a portfolio of stocks that share common criteria like the geographic region, the company size or the industry. Index funds and ETFs are created to mimic the behavior of stock market indices like the Standard & Poor's 500 Index in the United States or the DAX in Germany.
Self-investors profit from low fees and good diversification which guarantees optimal retirement savings which is the reason why Warren Buffet warmly recommends them to his wife.
Why a personal, do-it-yourself index?
A personalized or do-it-yourself index is similar to a standard index: It is a basket of stocks that have been selected based on common investment criteria. Unlike a standard index which is based on a third party market definition, the personalized custom index uses your own criteria.
This gives you the advantage of avoiding stocks you don’t like while still receiving the benefits from diversification and low cost. Strictly speaking, your fees are even lower because you have absolutely no commissions that funds, even index funds, all entail.
The Obermatt stock filter helps you create your own personal stock index. Enter your investment strategy and filter those industries, business sizes, and regions with which you want to create your portfolio.
Lower Risk with do-it-yourself
An index fund or an index ETF is always bought from a bank or a bank-like corporation. While these financial companies are considered very safe, they remain an investing vehicle that stands between you and the company you are investing in. So you have a residual risk in the "counterparty", a so-called counterparty risk. Only time will tell whether this will affect you in the future. You don't have this risk with your own, diversified Do-it-yourself Index which means that your money is safer (remember to always diversify).
Returns higher with do-it-yourself
If you invest in a broadly diversified stock portfolio yourself, then you are avoiding the core mistake which all index funds make by definition: You do not hold more stocks which are more expensive and fewer stocks which are less expensive. An index fund does exactly this: It holds more expensive shares than cheaper shares. Holding stocks by weighting them equally or picking value stocks may give you a higher return in the long run than relying on company valuation (as index funds do).
Our backtesting confirmed that the Obermatt Top 10 Stocks generated an outperformed corresponding country stock indexes by 8%. We measured this in 50 stock markets over 3 years, a total of more than 150 investment years (more research at the Ben Graham Center). The current performance is tracked at Obermatt so that you always can check how well our ranks work.
Do not be fooled by any backtesting! For statistically sound statements only a few years of backtesting is not enough. An investment strategy would have to prove itself in dozens of economic crises before one could statistically prove that it is better than pure chance. And even if you have such a proof, the strategy may still underperform for several years until it moves back to a phase of outperformance. You have to decide yourself what you believe in respect to return expectations - in the very true meaning of do-it-yourself.
But something else also speaks for more retirements savings. While the commissions on index funds are relatively small, when accumulated over years, even a 0.3% commission fee could be as much as a nice middle-class car. If you go into retirement, would you prefer to have this car in your garage or in the garage of your investment advisor? With your Do-it-yourself Index the car is in your garage because the advisory costs fall away as you do the indexing yourself.
Calculation example for lower costs with do-it-yourself indexing
Typical index funds carry annual administration fees of 0.2% to 0.8%. This means that an annual investment of 10,000 ($, £, €, etc.) for 30 years generates administration fees of 69,000 (based on 0.3% commissions and 8.0% average stock returns). This amounts to a nice middle-class car. Check the administration fees calculator for your own situation.
These costs are still much lower than those of a classical financial advisor or a pension fund that easily puts you back 383,000 by the time you retire (at 2.0% administration and hedging expenses; other assumptions as above). So you are better off buying an index fund than give your money to someone else.
And maybe even better for you: Your own Do-it-yourself Index because then you save the 69,000 as well and end up with over a million in capital by the time you retire (based on the assumptions in this example).