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Could you match the investment returns of my dead Uncle Arthur?

By Andrew Hallam - June 20, 2023

I only met my great Uncle Arthur once.

I was 12 years old.

I believe his advanced age rendered him blind and mostly deaf.

Of course, I could fill pages with how horrible that would be.

But as a silver lining seeker, there’s at least one benefit: he had the tools to thrash the investment performance of almost everyone you know.

Could you keep pace with Uncle Arthur? Maybe. But you might need to be blind and deaf.

If Uncle Arthur had a diversified portfolio of index funds, he would have thrashed the lifetime returns of most private equity funds, most hedge funds, most college endowment funds, most day traders, most tactical asset allocation funds and most actively managed pension funds. That isn’t an opinion. It’s an easily verified, peer-reviewed academic fact.

Building and maintaining such a portfolio isn’t complicated. But most people can’t do it. That’s because, deep down, we sometimes believe that we, or someone we meet, can actually see the future. Just this one time, we might hold off on investing to wait for markets to “settle.” Just this one time, we might toss discipline aside to chase a hot-performing fund, individual stock or index. Just this one time, we might invest money in a private equity fund or store retirement money in a bank account.

And what if that appeared to work? Then like a winner in a casino, we would wander back in. We might even tell ourselves, “Just one more time.”

Yet, over an investment lifetime, Uncle Arthur would kick our butts.

But how are we, as humans, so easily led astray?

One such theory is in Maria Konnikova’s superb book, The Confidence Game: Why We Fall for it…Every Time. She says that, deep down, there’s a part of human nature that loves stories… and wants to believe them. This is strangely complex because, no matter how far-fetched the stories might be, there’s a strong tendency for us to bring them to life.

Somebody might suggest you can gain 25 percent per year with an exclusive fund. They might say Bitcoin is going to $2 million. They might say stocks are going to crash, so you better sell now. They might say a hot stock is getting hotter; buy it while you can.

We badly want to believe such stories, whether they come from inside our heads or from someone else’s mouth. Ironically, even sellers of such forecasts sometimes fool themselves.

Now couple that with fear and greed.

This is why most investors can’t come close to earning the lifetime performance of a diversified portfolio of index funds. It requires that we’re immune to all forecasts, all stories, and all human emotions.

Uncle Arthur might still have bristled at the thought of losing money. His heart might have beat faster, imagining an easy windfall. But he couldn’t access the Internet. Cold-calling salespeople couldn’t reach the guy. He couldn’t watch or listen to business news on television, podcasts or the radio. And his portfolio would have benefited from a lack of all that noise. 

This brings us to you and me. If we want the highest statistical odds of lifetime success in the markets, we need to tune the noise out. Ignore the stories. Ignore the pitches. Ignore the voices in our heads. Ignore the current level or direction of the market.

That’s easier said than done. But if you’re lured by short-term temptations over a dull, long-term approach, remember the most important truth.

The long-term is every short-term combined.

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Andrew Hallam is the best-selling author of Millionaire Expat (3rd edition), Balance, and Millionaire Teacher.