Indexing vs picking winners

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Shares play a different role than property, and that’s their superpower. In this third Wealth First Principles instalment, we outline a simple, rules-based framework to build a resilient share portfolio that complements property: liquid, globally diversified, tax-aware, and low-cost. The evidence is clear: most active managers and stock-pickers underperform over time. Instead, capture the market return with index funds or diversified ETFs, then let discipline, not prediction, do the heavy lifting.

We unpack what truly drives returns (the Equity Risk Premium), why volatility is the “price of admission,” and how dividends and franking credits fit into a broader, global allocation. Avoid the big four mistakes: over-trading, timing, performance-chasing, and abandoning strategy in downturns. For investors seeking extra robustness, we discuss rules-based alternatives to plain market-cap indexing (equal-weight, value, quality, factor tilts), useful now given concentration risks.

Because Australia is ~1.7% of developed markets and concentrated in banks/resources, we make the case for meaningful global exposure to technology, healthcare, and leading consumer brands. Finally, a practical blueprint: set goals and allocation, pick low-cost structures (e.g., DHHF, VDAL, or factor-tilted ETFs), rebalance to a written policy, and stay the course. Do this consistently, and shares become a dependable engine alongside property for decades.

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