The Big Lie: We Can’t Beat the Market


beat index funds

The following guest post is courtesy of freelance writer Scott Welsh.

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We’re all wasting our time.

The market is efficient. All future earnings are already built in. By the time we see any information, the move has already happened. Trading is the most competitive field in the world.

And someone once told me, “If there was a way to do better than the market, believe me, I would have already found it.”

In short, you can’t beat the market. Neither can I.

It’s a losing game for us “regular” folks.

The only hope we have is to invest in Index Funds. Here’s what the experts say:

  • According to Robert Laura, author of Naked Retirement, the sad reality is, the average investor has little chance of beating the market. -Investopedia
  • David Swensen, manager of Yale’s nearly $24 billion endowment also endorsed index funds, stating, “When you look at the results on an after-tax basis, over reasonable long periods of time, there’s almost no chance that you end up beating the index fund.”  -from tonyrobbins.com
  • The world’s smartest people have done incredible studies on this for over 40 years. What they find is the best way to make money in the stock market is to simply buy an “Index Fund.” -Mr. Money Mustache

Yes. I’m sure they’re right. I’m sure that’s the thing to do.

Wait, I’ve got a better idea. Why don’t we take every investment book we’ve ever read and toss them into the front yard and make a community bonfire?

Honey, call our financial advisor. We’re selling everything we own and putting every cent into an Index Fund!

Okay, dear.

Wait a minute, honey, don’t call the advisor just yet. Maybe we should consider this for a second.

I understand where the experts are coming from. Picking winning stocks is not easy. Doing weeks of research on individual companies takes a lot of time.

And that doesn’t even take into account how hard it is to hold a winning stock or when to sell or how many stocks to own or how many shares to buy or when to take a position in the first place.

It’s hard.

Even if we have the right stocks, it’s incredibly easy to make a few emotional decisions and not do as well as we should have.

Adding all those factors up, it’s also easy to see how Index Funds can beat individual investors.

But does that mean we should all give up? If something is hard, does that mean we should all just turn tail and run?

Let’s see.

Picking stocks is difficult. That’s for sure.

But let’s say we loved Apple as a company a few years ago. That’s not that hard to fathom, right? And maybe we thought the idea of an iPhone was pretty cool.

So what if we bought a chunk of Apple stock on July 1, 2007 (the first iPhone came out June 29, 2007) and just held it because we don’t know anything about trading?

If we did that simple thing, we would have beaten an Index Fund by 19% per year.

Or what if we liked Facebook and did the same? We would have beaten the market by 30% per year.

The results for Google or Amazon are similar.

In short, we could have bought stock in a company we liked (and knew almost nothing about) and destroyed the market.

I know. The experts would say that the regular person would never buy any of those stocks. Who could have known?

So what if we did something simpler? What if bought into William Eckhardt’s fund in 2000 and just held it? We happened to know that Eckhardt founded the Turtles and we thought that was a cool story.

If we did that, we would have averaged 7.11% per year.

An Index Fund would have averaged 6.6% per year.

So now I’m thinking, helpful experts, that your suggestion of giving up and buying an Index Fund–while expeditious and certainly painless–might not be, in a matter of speaking, the American Way (don’t click if you don’t like bad words).

Here’ one more thing to think about.

In 2007, the experts said this:

“The iPhone isn’t the future. It isn’t a revolutionary mobile device ushering in a new era,” -from thestreet.com

The iPhone will never work and regular people should only buy Index Funds.

Hmm.

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The Big Lie: We Can't Beat the Market

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