Who doesn't want to beat a professional at their own game? The vast majority of people don't ever have a chance of ever beating the "average" professional in their chosen field of expertise. Can you imagine running back a 60-year punt return for a touchdown? Dunking a basketball over some 7-footer in the NBA, or hitting a home run with a full count? Well, maybe you've thought of it, but then you wake up from that dream and realize that it was just a dream and will only ever be a dream. Ironically, investing is quite a different type of game. A game where the amature can most certainly beat the brightest minds on Wall Street.
How? It's quite straight forward actually.
So what's the secret, drum roll please...buy a low-cost index fund. Over the past 5-years 88% of actively managed large-cap funds UNDER-PERFORMED there respective index. If 88% isn't good enough, just hold on to your low-cost index fund for 15-years and that number rises to over 92%. That means you (the so called amature) will have beaten over 92% of professional fund managers at their own game. Can you say Cha-Ching. Don't take my word for it, read the SPIVA (S&P Indices Versus Active) report - page 8.
I know, I know what you are thinking, it's boring, I know can do better, I'm smart, and you might also be thinking but I have an edge, I know something the market doesn't know. I know this or that. I'm sorry to tell you that you don't. I'm sure you are very smart, but being smart doesn't equate to beating the market or being a successful investor. Ask Issac Newton, regarded as one of the smartest scientists the world has ever known who lost a fortune because he could not control his emotions.
So why should you be implementing a low-cost strategy. 1. Because it works, it works over all time periods, various markets, and asset classes: large-cap, small-cap, international, fixed income, etc. 2. Investing should be boring, so boring in fact that you don't want to constantly watch "the market". Because if you watch the market too closely you might be inclined to start thinking (again) that you can beat the market and fall into that virtuous loop of thinking. Our ego can be a nasty little bugger.
So the next time your neighbor, your co-worker, or your-fill-in-the-blank friend spouts off about how well their investment fund is doing, I can almost guarantee that over any significant period of time your low cost index fund will out-perform their short-term high flyer. Lastly, by implementing this approach you are proving how smart you really are - Einstein (and Newton) would be proud.
Paul R. Rossi, CFA