Why you should stop trying to be better than average!
[Estimated time to read: 2 minutes]
The New York Times has just benchmarked last year’s stock pick lists from Forbes, CNBC and Money, against returns from the broad S&P index.
The S&P returned 9.5% growth in 2016.
Anyone who’d followed Forbes’s list would have seen 7% growth.
Money magazine’s list generated just 4.9% growth…
And only CNBC aced it at 10.6%...
So what does this teach us?
That CNBC have got the best stock pickers?
It shows us that stock picking is nothing but a fool’s errand.
If experts fail to beat the market, how can average investors succeed?
97.8% of actively managed funds – those where experts guess which stocks to pick – fail to beat the index they’re speculating on.
Of these active funds, Ken French, Professor of Finance at Dartmouth College says:
“When you pay someone to do better than the market, you should expect to lose…you are wasting your time and money trying to beat the market.”
So if you want to be a successful investor, stop trying to beat the market.
Rick Kahler, president of Kahler Financial Group sums it up:
“When it comes to investing, it’s a losing proposition to try and be anything better than average.”
Why average is actually more than good enough
Considering most actively managed funds fail, if you want to succeed you need to do the opposite to these funds’ managers:
Instead of active think passive.
Instead of speculation choose evidence.
And instead of failure…choose average market returns…
Unlike the above hand-picked stock lists from Forbes etc., last year Vanguard’s Total Stock index fund returned 12.5% for investors.
It’s a passive fund…
Invested based on evidence…
Consistently delivering average market returns for its successful investors.
Proof that being an average investor is more than good enough.
In 2016 passive funds beat active alternatives black(rock) and blue
BlackRock is the world’s largest asset manager, it increased new business in its passive iShares arm by 7.7% last year, taking it to about $140bn.
Vanguard attracted an increase in exchange traded fund (passive) inflows of 14.4%, taking it to $96.8bn.
And together they grabbed 60.4% of last year’s total global exchange traded fund inflows of $390bn.
The Financial Times now estimates that $3.5tn is invested in global passive exchange traded funds (ETFs).
Since 2007, assets managed in passive funds, which include ETFs, have grown four times faster than the traditional active products that try to beat the market – and invariably fail.
Bill McNabb, Vanguard’s Chairman, says of the move by investors to passive funds:
“Investors are increasingly gravitating to a lowcost, disciplined, longterm approach.”