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No one likes to be told they’re stupid. No one likes to hear that they aren’t smart enough to do something, especially when that something is done by millions of people every day. At the same time, however, no one wants to do something that they aren’t qualified for and could cause them harm.
I don’t fix my car when there’s a problem because I simply don’t have the expertise. Nobody’s going to call me stupid because I don’t know how to do a wheel alignment, not to mention the fact that I don’t have the proper tools and equipment.
I don’t think you’re stupid for seeking out experts when a problem is beyond your field of knowledge but I bet you, and I know many others, do just that when it comes to investing.
You see buying a stock is easy, and while you don’t feel dumb sending your car to a mechanic, if I told you that you don’t know enough to buy stocks, you would probably be insulted. But you shouldn’t be. I admit that buying stocks, and doing well at it, is beyond me. It’s not that I’m not smart enough, it’s just that I haven’t had the proper training and I don’t have access to the proper tools and equipment. I’m smart enough to fix cars but I haven’t been trained and so to me there’s no difference between that and chemical engineering.
Don’t feel bad because it turns out that even professionals aren’t very successful when it comes to buying and selling stocks. The people whose job it is to make money in stocks, I’m thinking specifically of mutual fund managers, aren’t very good at what they do either. It turns out that over a ten year period, any ten year period, 80% of all actively managed mutual funds fail to beat the stock market average. That’s like your mechanic only fixing your car 20% of the time. I’d get a new mechanic.
But lucky for mutual fund managers, they aren’t paid to beat the market, they get paid through, fees and commissions, as long as people buy their product regardless of their ability to make them any money. And people do buy because the marketing is good. They convince you that you’re a “smart investor” and that their fund is different than the rest. They do this by showing you short term returns. Yeah maybe they had a few good years with returns of 8%, 20% and 4% while the stock market average was down 1%, up 10% and down 2%. But over a longer period of time I bet they didn’t beat the average at all.
Do you really have the time to research whether this stock or that one is a good investment? Do you have the same level of access that the professionals do to attend annual meetings or hold conferences where CEOs and CFOs are available to answer your questions?
Even with this level of access and sophisticated analysis, the professionals fail more often than they succeed. So what’s an investor to do?
Well the obvious choice is to reduce costs (less trading) and reduce fees. Index funds are a good fit in both cases as you can completely eliminate trading costs by making your purchase through the fund company itself rather than through a brokerage and you aren’t going to get any lower fees than an index fund. Index funds have the added benefit of matching the overall market a benchmark that 80% of actively traded funds can’t beat. You’re not stupid and that’s exactly why you’re confident enough to put most of your investable income into index funds.
Now I don’t want to kill the dream entirely so, if you have enough money invested in the indexes and are getting itchy to try your luck in other places, then by all means take a small amount of money and try your luck with individual stocks, other types of mutual funds or any of the other products the investment industry says can make you rich. But only invest a small amount of your overall portfolio and only an amount you’re willing to lose entirely.