Beat the market with just two shares

New research by financial website The Motley Fool - Fool.co.uk reveals that investors could have beaten mundane stock market returns over the last five years with just two shares.

Over the last five years, the FTSE 100 index has risen just 13%. That is an average return of around 2.5% a year. However, over half of blue chip companies have beaten the market - and some have soundly trounced the market.

The ten top-performing FTSE 100 shares have risen over 400% in five years
The FTSE's best-performing share has risen 900% since October 2004
The top twenty FTSE 100 shares have gained around 270%

Risks and rewards

Historically investing in the stock market has returned around 11% a year. However, the stock market return over the last five years has failed to match the long-term returns. The total return, which includes re-invested dividends, is around 39% or 7% a year.

But although the overall stock market return has been poor, not all companies have performed appallingly. The top 10 companies have increased around 400% over five years; the top twenty FTSE companies have gained around 270%.

The FTSE's best performing shares

Shares in software company Autonomy have risen over 900%, and the market value of insurer Admiral has gained 260% in five years. Household products maker Reckitt Benckiser has increased 120%, and brewer SABMiller has more than 115%.

Consequently, allocating, say, a small portion of a share portfolio to just one or two of the companies that have outperformed the index, alongside an investment in a stock market index tracker would have delivered better returns than investing in the index alone.

For example, investing 90% of a portfolio in an index tracker and 10% in one of the top 10 performing shares would have boosted the return from 7% a year to 12% a year.

David Kuo, Director at The Motley Fool, comments: "For most people investing in a stock-market index tracker is one of the best ways of getting exposure to shares. However, for a handful, beating the index may be more important than simply matching market returns.

"One way of improving the return without significantly increasing risk is to apportion a small amount of an investment portfolio to one or two judiciously chosen shares alongside an index tracker.

"Boosting the long-term return by as little as 1% a year over 30 years on a £10,000 lump-sum investment can mean the difference between having £228,000 and £300,000 in the pot.

"You don't need to beat the market by much to be significantly richer. But to do so consistently requires skill rather than luck."