Sometimes it's difficult to comprehend the enormous impact earning a few extra percentage points has on your portfolio each year. Paul Merriman in his article A Vanguard fund strategy to double your nest egg does a pretty good job putting it in perspective. Not only does he give you a great idea for a balanced, well-diversified (and cheap) portfolio, but he highlights how you can double your money once you retire.
Merriman explains how a simple portfolio made of Vanguard index funds has outpaced the S&P 500 by 2.2% over the past 10 years. Does that 2.2% difference make a big impact over the life of your portfolio? Merriman explains that "on a $100,000 portfolio over 10 years, that extra performance is worth $45,901 ($250,095 at 9.6% vs. $204,194 at 7.4%)....A typical investor will have money in the market for at least 40 years, including pre-retirement and postretirement periods. Over that long span, a $100,000 portfolio would grow to $3.91 million at 9.6% vs. only $1.74 million at 7.4%...This seemingly small difference in return is equally significant to younger investors accumulating assets. If you started with $5,000 and added that same amount every year for 40 working years, a return of 7.4% would give you a portfolio worth $1.19 million. If instead you earned 9.6%, you would wind up with $2.18 million — nearly twice as much.."
However, there is a catch according to Merriman, and this extra return isn't entirely free. When starting out, it may take a few hours to set up your portfolio and then maybe an hour to rebalance investments each year. If you invest for 40 years, maybe you spend 50 total hours working on your portfolio. If your reward for your efforts is $990,000 (the difference between a 7.4% return and 9.6% return - see above), that gives you $19,800 per hour of work. Hey, I think I'll take that.
Sunday, November 24, 2013
Wednesday, October 2, 2013
How Long-Term Investors Are Failing
I came across a great article today by Paul Merriman titled "7 Reasons Why Retirement Savers Fail." He explains how investors continue to work against themselves when investing and why they regularly achieve returns much lower than popular indices. The entire article is well worth a read but here are a few clips:
"In the 20 years ending Dec. 31, 2012, the Standard & Poor’s 500 Index compounded at 8.2% while the average investor in U.S. equity funds made only 4.3%. In other words, nearly half the return of the market was lost....How did investors lose half the return of the market? Where did it go? Three powerful forces took it away. First, investor behavior, mostly emotion-based buying and selling based on emotions, costs two percentage points. That brings the return down to 6.2%.Second, there's the cost of running funds that are trying to beat the market. The average annual cost of operating a fund, 1.3%, reduces the return further, to 4.9%. Third, portfolio turnover is almost always higher in actively managed mutual funds — sometimes much higher. This can take away another 0.6 percentage points, bringing the return down to the 4.3% reported by Dalbar."
"The latest report repeats a conclusion Dalbar has reached year after year: 'No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments are more successful than those who time the market.' The answer, it seems obvious, is for investors to stay in the game. They will do that only if they have confidence in the choices they have made. I think the most dependable way to achieve the full returns of the market is to invest in a diversified mix of index funds with low expenses. If you couple this with patience and with enough bond funds to keep you within your comfort level, then I think you are likely to be more successful than 99% of all other investors."
Paul Merriman writes a lot of good stuff and I recommend anything he writes. If anyone is interested in reading more, check out his website. He has some free investing books that you can download!
"In the 20 years ending Dec. 31, 2012, the Standard & Poor’s 500 Index compounded at 8.2% while the average investor in U.S. equity funds made only 4.3%. In other words, nearly half the return of the market was lost....How did investors lose half the return of the market? Where did it go? Three powerful forces took it away. First, investor behavior, mostly emotion-based buying and selling based on emotions, costs two percentage points. That brings the return down to 6.2%.Second, there's the cost of running funds that are trying to beat the market. The average annual cost of operating a fund, 1.3%, reduces the return further, to 4.9%. Third, portfolio turnover is almost always higher in actively managed mutual funds — sometimes much higher. This can take away another 0.6 percentage points, bringing the return down to the 4.3% reported by Dalbar."
"The latest report repeats a conclusion Dalbar has reached year after year: 'No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments are more successful than those who time the market.' The answer, it seems obvious, is for investors to stay in the game. They will do that only if they have confidence in the choices they have made. I think the most dependable way to achieve the full returns of the market is to invest in a diversified mix of index funds with low expenses. If you couple this with patience and with enough bond funds to keep you within your comfort level, then I think you are likely to be more successful than 99% of all other investors."
Paul Merriman writes a lot of good stuff and I recommend anything he writes. If anyone is interested in reading more, check out his website. He has some free investing books that you can download!
Sunday, September 8, 2013
Your Best Investment Move Ever
I think one of the huge problems investors face these days is knowing what information to trust and what information should be ignored. Do we trust prestigious newspapers like the Wall Street Journal or the New York Times? How about the Wall Street banks? They presumably have the most resources and, hence, the best information right? How about a friend or family member who insists he knows the next hot investment? Paul Merriman wrote a great article about just this topic called "Your Best Investment Move Ever." Unfortunately, the "right" investment source is probably one that is hardly ever in the news. That in itself is a mistake. Check out the article though. It's a quick read and has tons of good information in it. A few quick pieces from the article:
"Every investor can choose among three basic sources: Wall Street, the huge industry that's perpetually hungry for profits; friends, neighbors, relatives and others who are eager to show how smart they are; and the academic community, which rigorously studies what works — and what doesn't.
I call this choice Wall Street vs. Main Street vs. University Street. My pick is University Street and I've never regretted it."
And then a little bit later...
"You see, it was the academic community that taught me decades ago to add asset classes with long-term performance records higher than the S&P 500 Index, without additional risk.
All I did was apply the lessons. Perhaps the greatest of these was that proper asset allocation accounts for the overwhelming majority of the results of a portfolio."
I always made a point to largely ignore most of what i hear on TV or read in newspapers about investing. Most of the information I use comes from books written by trusted scholars. Below are a list of books I would recommend reading:
The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Return by John Bogle (side note: I recommend anything that John Bogle writes)
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton Malkiel
The Elements of Investing: Easy Lessons for Every Investor by Burton Malkiel and Charles Ellis
The Power of Passive Investing: More Wealth with Less Work by Richard Ferri
And if you are feeling ambitious...
John Bogle on Investing: The First 50 Years by John Bogle
Enjoy!
(Paul Merriman's bio on Marketwatch reads: "Paul Merriman is committed to educating people of all ages to get the most from their retirement investments. Founder of Merriman Wealth Management, a Seattle-based investment advisory firm, he is the author of numerous books on investing: "Financial Fitness Forever," "Live It Up Without Outliving Your Money," and the new "How To Invest" series, free at his website: "How To Invest" series: "First Time Investor," "Get Smart or Get Screwed: How to Select the Best and Get the Most from Your Financial Advisor" and "101 Investment Decisions Guaranteed to Change Your Financial Future." In his retirement, Paul writes a weekly column at MarketWatch and continues his weekly podcast, Sound Investing, which was recognized by Money magazine as "the best Money Podcast in 2008". He is president of The Merriman Financial Education Foundation and all profits from the sale of his books are used to advance financial literacy. His recommendations for portfolios of Vanguard funds, Fidelity funds and ETFs, podcasts, articles and books are available at paulmerriman.com. Follow Paul on Twitter @SavvyInvestorPM")
"Every investor can choose among three basic sources: Wall Street, the huge industry that's perpetually hungry for profits; friends, neighbors, relatives and others who are eager to show how smart they are; and the academic community, which rigorously studies what works — and what doesn't.
I call this choice Wall Street vs. Main Street vs. University Street. My pick is University Street and I've never regretted it."
And then a little bit later...
"You see, it was the academic community that taught me decades ago to add asset classes with long-term performance records higher than the S&P 500 Index, without additional risk.
All I did was apply the lessons. Perhaps the greatest of these was that proper asset allocation accounts for the overwhelming majority of the results of a portfolio."
I always made a point to largely ignore most of what i hear on TV or read in newspapers about investing. Most of the information I use comes from books written by trusted scholars. Below are a list of books I would recommend reading:
The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Return by John Bogle (side note: I recommend anything that John Bogle writes)
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton Malkiel
The Elements of Investing: Easy Lessons for Every Investor by Burton Malkiel and Charles Ellis
The Power of Passive Investing: More Wealth with Less Work by Richard Ferri
And if you are feeling ambitious...
John Bogle on Investing: The First 50 Years by John Bogle
Enjoy!
(Paul Merriman's bio on Marketwatch reads: "Paul Merriman is committed to educating people of all ages to get the most from their retirement investments. Founder of Merriman Wealth Management, a Seattle-based investment advisory firm, he is the author of numerous books on investing: "Financial Fitness Forever," "Live It Up Without Outliving Your Money," and the new "How To Invest" series, free at his website: "How To Invest" series: "First Time Investor," "Get Smart or Get Screwed: How to Select the Best and Get the Most from Your Financial Advisor" and "101 Investment Decisions Guaranteed to Change Your Financial Future." In his retirement, Paul writes a weekly column at MarketWatch and continues his weekly podcast, Sound Investing, which was recognized by Money magazine as "the best Money Podcast in 2008". He is president of The Merriman Financial Education Foundation and all profits from the sale of his books are used to advance financial literacy. His recommendations for portfolios of Vanguard funds, Fidelity funds and ETFs, podcasts, articles and books are available at paulmerriman.com. Follow Paul on Twitter @SavvyInvestorPM")
Sunday, June 2, 2013
The Stock Market Game: The Worst Kind of Game
My first exposure to “The Stock Market Game” was my junior year of high school and I loved it. I loved tracking the market. I loved learning why the market went up or down on a particular day. I loved following “my stocks” and buying new ones and selling the losers. Most of all, I loved that I finally knew what it was like to be a real investor! Let me tell you, I was young and stupid and didn't know any better. “The Stock Market Game” may be one of the worst “games” used to attempt to teach basic wealth management.
The class was economics. It was one of those classes where many people used to catch up on sleep because the concepts being taught were completely foreign to anything they had ever learned before. While I was not the most interested in economics, the class was completely worth it because for the last 15 minutes of class, we all got to go down to the computer lab and pretend we were real investors with our portfolio of stocks. Learning a company’s ticker symbol, trying to fathom what it meant if a company had market cap of $30 billion, and becoming lost in the meaning of a P/E ratio were a few of the experiences I faced in that computer lab.
After several weeks, my team’s portfolio was doing great. It was one of the top teams in the state even. I was gaining confidence in my abilities to pick winning stocks (also known as luck) and I wanted to invest some real money. I came across this company called Superconductor Technologies (SCON) (probably from googling “hot stocks”) and I learned that it would soon enter the Chinese market and I probably thought “there are billions of people in China. How can it not do well?” I convinced my Dad to let me buy some actual stock in the company, so I took $100 and bought 10 shares in Superconductor Technologies. Finally I’m a real investor!
But then disaster struck. This is the stock chart of the S&P 500 over the life of game.
As you can imagine, my portfolio (along with everyone else's) in the “The Stock Market Game” soon tanked. For many, that was the end of investing. It was just a game and the game was over. If that was a person’s first exposure to investing, I imagine people took one of three routes after that: 1) They saw how the market dropped substantially and will be scared to invest any money when they have real money to invest, 2) They learned a little bit about what “investing” was about and when they have real money to invest, they will become traders, constantly buying and selling stocks because that was their only exposure to "investing", or 3) The game will intrigue them and they will want to learn more about the markets and investing. I took route 3. I’m sure I was in the small minority.
Let me just say that if “The Stock Market Game” was a person’s only exposure to the stock market and they have journeyed down routes one or two, then it’s an absolute travesty. Let's discuss the pros and cons of this game:
Pros:
1. Exposure to the stock market, different companies and important market terms - if there is any point of this game, this should be it. People need to know the basic building blocks before they even think about investing.
Cons:
1. It teaches investing the exact opposite of how it should be taught - this game encourages high risk trading over a very short period of time. A team gets rewarded if they are one of the top performing teams in the area and state. However, there is no penalty if you lose every dime you invest. What is that teaching people? Investing is not an activity stretched over a few months. It's an endeavour stretched over several decades. How a portfolio performs over a two month span is essentially meaningless in the grand scheme of things. Investing education needs to focus on having a long-term approach. There is no room for a high-risk, high-reward gambling game in this education.
2. Each team is given too much cash to invest - the great majority of people do not start investing when they have $1 million or even $100,000. Most probably start investing a few $100. Wouldn't it be better if kids were taught where and how they could start investing a few hundred dollars? Granted imagining you have hundreds of dollars to invest isn't as fun as imagining yourself with a millions dollars but this should be about realistic investing and not some fantasy game.
Obviously I think the cons outway the pros. I'm not sure how a teacher who understands the basic of investing could endorse this game. Oh did I mention that wall street endorses a lot of the stock market games that I've seen? Well of course they do! It means grooming young investors to become naive investors which puts more money in the hands of the big banks.
So to wrap things up, the stock market game that is played in schools all over the country is not a good learning tool. It is actually doing the opposite by teaching kids how to gamble with their money through high-risk, high-reward trading. If a teacher really wants to teach kids about investing they should focus on indexing, diversification, and compound interest. A teacher should encourage their students to read essays/books/speeches by Warren Buffet and John Bogle. These teaching will create the true building blocks for a life of investing.
The class was economics. It was one of those classes where many people used to catch up on sleep because the concepts being taught were completely foreign to anything they had ever learned before. While I was not the most interested in economics, the class was completely worth it because for the last 15 minutes of class, we all got to go down to the computer lab and pretend we were real investors with our portfolio of stocks. Learning a company’s ticker symbol, trying to fathom what it meant if a company had market cap of $30 billion, and becoming lost in the meaning of a P/E ratio were a few of the experiences I faced in that computer lab.
After several weeks, my team’s portfolio was doing great. It was one of the top teams in the state even. I was gaining confidence in my abilities to pick winning stocks (also known as luck) and I wanted to invest some real money. I came across this company called Superconductor Technologies (SCON) (probably from googling “hot stocks”) and I learned that it would soon enter the Chinese market and I probably thought “there are billions of people in China. How can it not do well?” I convinced my Dad to let me buy some actual stock in the company, so I took $100 and bought 10 shares in Superconductor Technologies. Finally I’m a real investor!
But then disaster struck. This is the stock chart of the S&P 500 over the life of game.
As you can imagine, my portfolio (along with everyone else's) in the “The Stock Market Game” soon tanked. For many, that was the end of investing. It was just a game and the game was over. If that was a person’s first exposure to investing, I imagine people took one of three routes after that: 1) They saw how the market dropped substantially and will be scared to invest any money when they have real money to invest, 2) They learned a little bit about what “investing” was about and when they have real money to invest, they will become traders, constantly buying and selling stocks because that was their only exposure to "investing", or 3) The game will intrigue them and they will want to learn more about the markets and investing. I took route 3. I’m sure I was in the small minority.
Let me just say that if “The Stock Market Game” was a person’s only exposure to the stock market and they have journeyed down routes one or two, then it’s an absolute travesty. Let's discuss the pros and cons of this game:
Pros:
1. Exposure to the stock market, different companies and important market terms - if there is any point of this game, this should be it. People need to know the basic building blocks before they even think about investing.
Cons:
1. It teaches investing the exact opposite of how it should be taught - this game encourages high risk trading over a very short period of time. A team gets rewarded if they are one of the top performing teams in the area and state. However, there is no penalty if you lose every dime you invest. What is that teaching people? Investing is not an activity stretched over a few months. It's an endeavour stretched over several decades. How a portfolio performs over a two month span is essentially meaningless in the grand scheme of things. Investing education needs to focus on having a long-term approach. There is no room for a high-risk, high-reward gambling game in this education.
2. Each team is given too much cash to invest - the great majority of people do not start investing when they have $1 million or even $100,000. Most probably start investing a few $100. Wouldn't it be better if kids were taught where and how they could start investing a few hundred dollars? Granted imagining you have hundreds of dollars to invest isn't as fun as imagining yourself with a millions dollars but this should be about realistic investing and not some fantasy game.
Obviously I think the cons outway the pros. I'm not sure how a teacher who understands the basic of investing could endorse this game. Oh did I mention that wall street endorses a lot of the stock market games that I've seen? Well of course they do! It means grooming young investors to become naive investors which puts more money in the hands of the big banks.
So to wrap things up, the stock market game that is played in schools all over the country is not a good learning tool. It is actually doing the opposite by teaching kids how to gamble with their money through high-risk, high-reward trading. If a teacher really wants to teach kids about investing they should focus on indexing, diversification, and compound interest. A teacher should encourage their students to read essays/books/speeches by Warren Buffet and John Bogle. These teaching will create the true building blocks for a life of investing.
Tuesday, May 14, 2013
50 Unfortunate Truths About Investing
I came across this article called "50 Unfortunate Truths About Investing" by Morgan Housel tonight and it's amazing how many of these are spot on. If only more people knew them...well worth a 15 minute read.
Thursday, April 25, 2013
The Retirement Gamble
I watched a great little documentary today from PBS's Frontline called "The Retirement Gamble" and the retirement crisis in this country. It was fascinating really. It all came down to how uneducated our country is when it comes to investments and how people really have no idea how to invest for their retirement.
You may be in your mid-twenties and thinking, "retirement huh? I don't need to worry about that yet." With all due respect, you are wrong. But it's not necessarily your fault. It's not your fault that our school system fails to teach us basic money management, arguably one of the most important topics that everyone needs to learn because no matter what job you have later in life, you will still need to manage your money. It's not your fault that the banking and investment industry mesmerizes us with their talking baby commercials encouraging us to trade stocks and trade often (this increases your cost). It's not your fault that you start working and your company advises you to put money away in a 401k but then it doesn't give you any instruction on how to invest wisely. This is a problem. This is a big problem.
There are three very basic things all people need to know about investing:
1) Keep costs low! Costs of your investments and fees from the management companies make a huge different on how much money you end up having. Usually costs/fees can range anywhere from 0.04% of your investment to more than 2%. If you don't want to watch the entire video, skip to minutes 25-29. That will tell you all you need to know.
2) Compound Interest is another key and it's why you need to think about saving early. Don't be that person in his/her early 30's who hasn't started saving for retirement yet. The key to compound interest is time. The greater length of time you invest, the larger your money grows. Here is a great seven minute video on the topic.
3) Diversify your investments. Simply put, you don't want to load your 401k with company stock. The risk is too high. A much better choice, like Mr. Jack Bogle (founder of Vanguard) talks about in the documentary, are index funds which invest in hundreds of companies all in a single fund for minimal cost.
One thing Jack Bogle said stuck with me. He explains that millions of Americans invest while putting in 100% of the money, taking 100% of the risk, and only getting 30% of the return (in reality it's a little over 36% seen in the video at the 25 minute mark). People do this by investing in these ridiculously expensive mutual funds instead of cheap, broad-market index funds even though study after study shows that over long periods of time, you will earn more money by investing in index funds than the average mutual fund.
If you only watch a second piece of this documentary, please watch minutes 39-43. They are golden.
Oh and one more thing. If you are truly interested in learning about investments, I recommend reading anything you can get your hands on written by Jack Bogle. If you need somewhere to start, how about this interview. Enjoy.
You may be in your mid-twenties and thinking, "retirement huh? I don't need to worry about that yet." With all due respect, you are wrong. But it's not necessarily your fault. It's not your fault that our school system fails to teach us basic money management, arguably one of the most important topics that everyone needs to learn because no matter what job you have later in life, you will still need to manage your money. It's not your fault that the banking and investment industry mesmerizes us with their talking baby commercials encouraging us to trade stocks and trade often (this increases your cost). It's not your fault that you start working and your company advises you to put money away in a 401k but then it doesn't give you any instruction on how to invest wisely. This is a problem. This is a big problem.
There are three very basic things all people need to know about investing:
1) Keep costs low! Costs of your investments and fees from the management companies make a huge different on how much money you end up having. Usually costs/fees can range anywhere from 0.04% of your investment to more than 2%. If you don't want to watch the entire video, skip to minutes 25-29. That will tell you all you need to know.
2) Compound Interest is another key and it's why you need to think about saving early. Don't be that person in his/her early 30's who hasn't started saving for retirement yet. The key to compound interest is time. The greater length of time you invest, the larger your money grows. Here is a great seven minute video on the topic.
3) Diversify your investments. Simply put, you don't want to load your 401k with company stock. The risk is too high. A much better choice, like Mr. Jack Bogle (founder of Vanguard) talks about in the documentary, are index funds which invest in hundreds of companies all in a single fund for minimal cost.
One thing Jack Bogle said stuck with me. He explains that millions of Americans invest while putting in 100% of the money, taking 100% of the risk, and only getting 30% of the return (in reality it's a little over 36% seen in the video at the 25 minute mark). People do this by investing in these ridiculously expensive mutual funds instead of cheap, broad-market index funds even though study after study shows that over long periods of time, you will earn more money by investing in index funds than the average mutual fund.
If you only watch a second piece of this documentary, please watch minutes 39-43. They are golden.
Oh and one more thing. If you are truly interested in learning about investments, I recommend reading anything you can get your hands on written by Jack Bogle. If you need somewhere to start, how about this interview. Enjoy.
Sunday, November 11, 2012
This May Make You Rich...If You Can Spare 20 Minutes
The point of this paper, above all else, is to educate people. I want to help you understand the dynamics of investing; something our school system has failed miserably to do. I want you to understand that personal investing is rather simple, and you don’t need a Wall Street adviser to help you figure how to invest your money.
Active vs. Passive Investing: The Basics
There are basically two styles of investing: active and passive management. Active investors try to strategically beat the market average by analyzing market conditions and researching company financials to take advantage of opportunities. These investors tend to trade relatively frequent; hence, they are “active” investors. Passive investors are just the opposite. They seek to achieve exactly the market return. Because passive investors tend to hold all or nearly all stocks in the market, they tend to trade relatively infrequent.
You may be asking why anyone would want to achieve the market return (passive investing) when there are unquestionably money managers who achieve returns above the market average (active). William F. Sharpe, Stanford professor and Nobel Prize recipient, explains in his paper The Arithmetic of Active Management that the answer is “embarrassingly simple.” Because passive investors return precisely the market return before costs, average active investors must also equal the market return before costs. If the entire stock market is made up of active and passive investments and the returns of passive investments equal that of the market, then by the simple laws of mathematics, active investments must equal the market as well. Sharpe goes on to say that “because active and passive returns are equal before cost, and because active managers bear greater costs, it follows that the after-cost return from active management must be lower than that from passive investment.” [5] This logic is simple mathematics and lays the foundation for why passive investments should be the sensible, long-term investment strategy for nearly all investors.
Active vs. Passive Investing: Performance
John Bogle created the Vanguard 500 Index Fund, the first index fund, for his newly formed company, The Vanguard Group, in 1976 and has been the face of passive investing ever since. Simply put, Bogle believes in passive investing. He believes that if investors hold low-cost index funds for the entire market, they will outperform the majority of investors long-term. Many studies back up this theory.
According to Lipper, a financial markets research and wholly owned subsidiary of Reuters Group, at the time the Vanguard 500 Index Fund was created in 1976, there were 260 actively managed domestic equity funds. As of December 2009, 124 have either merged or closed leaving 136 funds. If we examine the performance of those remaining funds and measure them against the performance of the Vanguard 500 Index Fund, the results are impressive. The Vanguard 500 Index beat 66% of surviving funds, but this is without taking into account survivorship bias, sales loads, and taxes. If we take out survivorship bias (count the number of funds that failed or closed during this 25-year stretch), the Vanguard 500 Index outperformed over 85% of actively managed funds. Using this data, Richard A. Ferri, founder of the investment firm Portfolio Solutions and Forbes columnist, believes that the Vanguard 500 Index Fund would have beat over 88% of active funds over the 25-year period if sales loads would have been factored in. While the Vanguard 500 did not have a sales load in 1985, many of the remaining 136 funds did. Ferri also examined the taxes factor with these funds. Index funds are inherently tax efficient because funds are not traded a lot throughout the year (less than 10% turnover). On the other hand, active funds average an annual turnover percentage of about 50% which generates more costs to the investor. Taking into account all the factors, Ferri predicts that over the 25-year period from 1985-2009, the Vanguard 500 Index Fund beat over 90% of the original 260 funds. [6]
John Bogle also performed a study (cited in Ferri 107) tracking actively managed mutual funds versus the Wilshire 5000, a total U.S. market benchmark. Bogle tracked a period from 1970-2009, and of the 355 general equity mutual funds that Bogle identified at the beginning of the period, 243 had closed or merged at the end of the 40-year period. That’s a failure rate of almost 70%! If we take a look at the remaining 112 funds, 71 failed to outperform the Wilshire 5000, which leaves 41 funds that outperformed the index. Of those 41 funds, 36 outperformed the index by less than 2%. If we took into account all costs of these actively managed funds, including sales loads and taxes, The Wilshire 5000 would have undoubtedly beat several more of these funds. Nonetheless, the Wilshire 5000 outperformed 63% of surviving funds and 88% of all funds. [7]
From these studies, you can obviously see that several funds do beat the market over a long period of time. However, the odds are not in your favor, and there is no way of knowing which funds will outperform the market in advance. If there was a way to predict superior performance, then this advantage would most certainly attract more money into the fund, hindering the fund manager’s ability to outperform the market. The simple fact is that the number of fund managers who can beat the index decade after decade can be counted on one hand. This claim can be backed up by John Bogle’s study in his book Bogle on Mutual Funds. In this study, Bogle ranked the top 20 equity mutual funds from 1972-1982 and then ranked how these exact funds finished the following decade from 1982-1992. The results are noteworthy:[8]
This kind of performance hardly supports the claim that top managers can repeat their performance over a long period of time. The average fund performed slightly above average for all funds, but the range in performance for the following decade ranked anywhere from 2 to 245 out of 309. This is not quite the long-term assurance a long-term investor should be looking for. Bogle tested the same period from 1982-2002 and saw a similar pattern:
As you can see and as you have always heard, excellent past performance does not guarantee future excellent returns. While the top 20 funds from 1982-1992 finished above the average fund, the range of rankings the following decade should make you think twice about trying to select a fund that consistently beats the market ( average fund ranked 350 out of 841 funds). In addition, just remember that the average fund here does not mean the market average (index fund). Bogle goes on to explain that the top 20 funds from 1972-1982 had a market return of 14.3% on average from 1982-1992, while the S&P 500 returns 16.1% during the same period. The top 20 funds from 1982-1992 had a return of 11.1% in the decade from 1992-2001, while the S&P 500 had a return of 12.6%.[9] The extremely tricky part of investing is picking one of those top 20 funds one decade and then hoping the following decade the fund does not collapse like so many funds have proven to do (See Top 5 funds of previous chart). An investor will most likely be investing over dozens of years, so trying to select a winning manager for multiple decades in a row does not make much sense. To put it simply, trying to select a winning fund over multiple decades is not the kind of chance you should be willing to take when an all-market index fund is more likely to give you above average returns (even more so after all costs) and is less risky.
As we discuss the likelihood that an actively managed fund can outperform a comparable index fund, it is easy to lose sight of the fact that nearly all individual portfolios have more than one fund. Allen S. Roth, founder of Wealth Logic, LLC and author of How a Second Grader Beats Wall Street, conducted a Monte Carlo simulation in which he tested the probability of one, five, and ten funds beating the index over stretches of one, five, ten and twenty-five years (assuming 2% expense fee for active funds and 0.23% expense fee for index funds). The results are eye-opening:[10]
The results speak for themselves. If you are a long-term investor, which you should be, why would you risk your future by investing in actively managed funds? As a serious investor, it is important to know the odds or you are at risk of putting a major dent in your nest egg.
Just to strengthen the argument even further, Larry L. Martin conducted a similar study in the early 1990’s about return probabilities in his article “The Evolution of Passive versus Active Equity Management” in The Journal of Investing. His results seen below show a direr situation for the active investor:[12]
Rick Ferri also set out to find the truth about return probabilities. Using 100 randomly selected actively managed equity funds (100 of the 260 that existed since 1976 – see earlier study), Ferri generated 10,000 portfolios and compared the return to an all index portfolio. Ferri only studied the 5-year time frame, but only 5% of 5-fund portfolios outperformed the benchmark by more than 0.5%. A more detailed look at Ferri’s study is shown below: [13]
These results are comparable to Roth’s and Martin’s study. It is hard to imagine why anyone would take the risk of selecting multiple actively managed funds in his or her portfolio.
The Experts
At this point you may be thinking “sure indexing might work for someone who knows little about investing but if I pay an advisor or ‘expert’ on investing to manage my portfolio, shouldn't he or she be able to beat the market? After all, they are experts.” That is a great question. Let’s take a closer look.
Allan Roth raises a good point on fund managers in his book How a Second Grader Beats Wall Street:
"We adults seem to buy into the expectation that our active manager is really good, so we will be among the few who beat the market. Of course, if my manager is so good that he can beat all the other managers, then why isn't he working for the billion-dollar investors?” [14]
Roth’s words remind me of this New York investment firm that has called me multiple times to silicate their big investing ideas trying to gain a new client. If this firm’s performance was as good as it said it was, why would it be calling a guy who just graduated college and works in a small town in northern Illinois? It seems like there would be clients lining up at its door if their performance was as good as promoted.
In the October 2003 edition of Money magazine, the magazine created “the ultimate investment club” by asking 24 of the top money managers to choose their top stock to form a 34 stock portfolio. One would think that the brightest minds could put together a portfolio that not only beat the market but crushed it. So how did this portfolio perform over the next year? A portfolio constructed by some of the brightest investment minds returned -2.4% while the U.S. stock market returned 11.5%.[15] That’s nearly a 14% difference! I do not need to tell you the effect that has on your money growth.
The next example of star fund manager inferiority is exposed in The New York Times in a 1993 experiment. The newspaper challenged five top professional financial advisers to select and manage a $50,000 portfolio made up of mutual funds that could beat an index modeled after the S&P 500. By October 1999, nearly six years later, not one adviser had beaten the index. While the index had an annual return of 21%, the average of the fund managers was a measly 13.8%. In other words, the average advisers portfolio would have grown to $112,000 in six years while $50,000 invested in the index would have grown to $164,000.[16]
Rick Ferri may have explained it best in his March 2012 issue of Forbes magazine when he proclaimed “My advantage is that I know what I don’t know, and unlike most investment advisers, I don’t have to make believe I know more.”[17] The point is, it is extremely difficult to beat the market after costs and even harder to know which fund managers will do it before they actually beat the market, so it is best to stick with index funds.
Active vs. Passive Investing: Costs
One of the main reasons that passive investing is the best strategy for long-term investors is the cost aspect of investing. Total costs an investor pays for a fund is often hard to see because the costs are built into the return on the fund most of the time. It is not like you get a bill in the mail that you have to pay. There are many costs that go into an actively managed fund. First there is the operating cost, or the expense ratio, that is attached to every fund including index funds. Many funds also have front-end or back-end sales commissions, a charge an investor must pay either when the fund is purchased or sold. There is also fund opportunity cost. A mutual fund often has a small percentage of its funds in cash reserves which have a much lower return than it otherwise would in stocks. Next, there are the transaction costs, or the costs associated with buying and selling stocks in the fund. Possibly the most costly of extra expenses are taxes (if held in a taxable account). Active funds tend to have a much higher turnover ratio than index funds, so even if an investor is not selling the fund, the fund manager is buying and selling stocks out of the fund which leads to more taxes. All of these costs take a huge chunk out of the return of the investor. On November 23, 1999, John Bogle gave a speech entitled “Equity Fund Selection: The Needle or the Haystack?” to The American Association of Individual Investors in Philadelphia that outlined the dramatic effect that costs can have on portfolio returns. Bogle examined the returns and costs associated with the average all-market mutual fund and an all-market index fund over the 15-year period. The chart below summarizes his cost estimates between actively managed mutual funds and index funds: [18]
From the years 1984-1999, the market returned 16.9% according to Bogle. However, if you back out all of the costs listed above, the average actively managed fund earned only 11.2%, a 34% reduction! On the other hand, the no load, low-cost, low-turnover all-market index fund would have return 15.8%, or 41% more than the actively managed fund. Bogle further explains the staggering difference between the two percentages in dollar amounts. If an investor started with an initial investment of $10,000 in 1984, the investor who put all of his money in the average actively managed fund would have about $49,000 after costs and taxes. You may be thinking that gaining almost five times your money after 15 years is pretty good, which it is! However, the key here is relativity. If an investor grew his initial $10,000 investment in a low cost, all-market index fund, that money would have grown to $90,000 net of costs. Now let me ask you, would you rather have $90,000 or $49,000? Even if an investor eliminated the tax cost because the investment is in a tax-free account, the investment would only grow to $70,000, which is still $20,000 of the index fund return.[19] Costs make a huge difference.
Human Rational Against Indexing
It is easy to see why more people do not index. Everywhere you look there are advertisements for a fund that has outperformed the Lipper average or a fund manager raving about his/her superior performance last year. Wall Street does not want you to know the truth because it will cost those big banks and investment firms lots of money! Do you remember all those extra fees that active funds cost you? Well most of that money is going to these firms. Simply put, the more these fund managers trade in their active fund, the more money they get and the less money the investor has. If an investor only holds index funds, these active managers don’t have a chance to collect all these extra fees, and therefore, less money in their pocket and more money in the investor’s pocket.
Another reason why investors believe they can consistently beat the market is because of our education system. It’s amazing that students go through school learning all about science, math, language, and history but what is one thing that every student will eventually need to know? Money management. When everyone starts their career, saving for retirement becomes a must but most have no idea how to start because they never had a basic class on investing at any level of their education. This strategy is very simple to learn and understand, but instead, “investors” rely on popular news outlets to tell us where to invest, which often leads to a much less satisfying investment return in the end.
Let’s go back to Allan Roth’s quotation when he urges investors to ask themselves, “if my manager is so good that he can beat all the other managers, then why isn't he working for the billion-dollar investors?”[20] It is a valid question, but humans in general don’t want to believe they are average or below average. They believe they can choose a wining manager because they put in the time and studied the numbers. It is easy to choose a manager who has a good track record the last ten years. As we showed earlier, though, past success is not an indication of future success, and it is very hard to tell who these top managers will be in advance. There will always be a group of investors who beat the markets. Always. Whether they beat the market because of luck or skill is another discussion (most academic research points to luck over skill), but as Greek shipping tycoon Aristotle Onassis once observed, “The secret of success in business is knowing something no one else knows.”[21] The fact is that the very large majority of investors do not have superior information, nor do they have the time and resources to try and find it. They read the paper, watch the news, and maybe even read a blog or two, but this is not superior information. This information is available to everyone. Thus, the best strategy for most investors is holding the entire market through low-cost index fund, and when it is time to retire, I would bet you are satisfied with your investment returns.
Active vs. Passive Investing: The Basics
There are basically two styles of investing: active and passive management. Active investors try to strategically beat the market average by analyzing market conditions and researching company financials to take advantage of opportunities. These investors tend to trade relatively frequent; hence, they are “active” investors. Passive investors are just the opposite. They seek to achieve exactly the market return. Because passive investors tend to hold all or nearly all stocks in the market, they tend to trade relatively infrequent.
You may be asking why anyone would want to achieve the market return (passive investing) when there are unquestionably money managers who achieve returns above the market average (active). William F. Sharpe, Stanford professor and Nobel Prize recipient, explains in his paper The Arithmetic of Active Management that the answer is “embarrassingly simple.” Because passive investors return precisely the market return before costs, average active investors must also equal the market return before costs. If the entire stock market is made up of active and passive investments and the returns of passive investments equal that of the market, then by the simple laws of mathematics, active investments must equal the market as well. Sharpe goes on to say that “because active and passive returns are equal before cost, and because active managers bear greater costs, it follows that the after-cost return from active management must be lower than that from passive investment.” [5] This logic is simple mathematics and lays the foundation for why passive investments should be the sensible, long-term investment strategy for nearly all investors.
Active vs. Passive Investing: Performance
John Bogle created the Vanguard 500 Index Fund, the first index fund, for his newly formed company, The Vanguard Group, in 1976 and has been the face of passive investing ever since. Simply put, Bogle believes in passive investing. He believes that if investors hold low-cost index funds for the entire market, they will outperform the majority of investors long-term. Many studies back up this theory.
According to Lipper, a financial markets research and wholly owned subsidiary of Reuters Group, at the time the Vanguard 500 Index Fund was created in 1976, there were 260 actively managed domestic equity funds. As of December 2009, 124 have either merged or closed leaving 136 funds. If we examine the performance of those remaining funds and measure them against the performance of the Vanguard 500 Index Fund, the results are impressive. The Vanguard 500 Index beat 66% of surviving funds, but this is without taking into account survivorship bias, sales loads, and taxes. If we take out survivorship bias (count the number of funds that failed or closed during this 25-year stretch), the Vanguard 500 Index outperformed over 85% of actively managed funds. Using this data, Richard A. Ferri, founder of the investment firm Portfolio Solutions and Forbes columnist, believes that the Vanguard 500 Index Fund would have beat over 88% of active funds over the 25-year period if sales loads would have been factored in. While the Vanguard 500 did not have a sales load in 1985, many of the remaining 136 funds did. Ferri also examined the taxes factor with these funds. Index funds are inherently tax efficient because funds are not traded a lot throughout the year (less than 10% turnover). On the other hand, active funds average an annual turnover percentage of about 50% which generates more costs to the investor. Taking into account all the factors, Ferri predicts that over the 25-year period from 1985-2009, the Vanguard 500 Index Fund beat over 90% of the original 260 funds. [6]
John Bogle also performed a study (cited in Ferri 107) tracking actively managed mutual funds versus the Wilshire 5000, a total U.S. market benchmark. Bogle tracked a period from 1970-2009, and of the 355 general equity mutual funds that Bogle identified at the beginning of the period, 243 had closed or merged at the end of the 40-year period. That’s a failure rate of almost 70%! If we take a look at the remaining 112 funds, 71 failed to outperform the Wilshire 5000, which leaves 41 funds that outperformed the index. Of those 41 funds, 36 outperformed the index by less than 2%. If we took into account all costs of these actively managed funds, including sales loads and taxes, The Wilshire 5000 would have undoubtedly beat several more of these funds. Nonetheless, the Wilshire 5000 outperformed 63% of surviving funds and 88% of all funds. [7]
From these studies, you can obviously see that several funds do beat the market over a long period of time. However, the odds are not in your favor, and there is no way of knowing which funds will outperform the market in advance. If there was a way to predict superior performance, then this advantage would most certainly attract more money into the fund, hindering the fund manager’s ability to outperform the market. The simple fact is that the number of fund managers who can beat the index decade after decade can be counted on one hand. This claim can be backed up by John Bogle’s study in his book Bogle on Mutual Funds. In this study, Bogle ranked the top 20 equity mutual funds from 1972-1982 and then ranked how these exact funds finished the following decade from 1982-1992. The results are noteworthy:[8]
This kind of performance hardly supports the claim that top managers can repeat their performance over a long period of time. The average fund performed slightly above average for all funds, but the range in performance for the following decade ranked anywhere from 2 to 245 out of 309. This is not quite the long-term assurance a long-term investor should be looking for. Bogle tested the same period from 1982-2002 and saw a similar pattern:
As you can see and as you have always heard, excellent past performance does not guarantee future excellent returns. While the top 20 funds from 1982-1992 finished above the average fund, the range of rankings the following decade should make you think twice about trying to select a fund that consistently beats the market ( average fund ranked 350 out of 841 funds). In addition, just remember that the average fund here does not mean the market average (index fund). Bogle goes on to explain that the top 20 funds from 1972-1982 had a market return of 14.3% on average from 1982-1992, while the S&P 500 returns 16.1% during the same period. The top 20 funds from 1982-1992 had a return of 11.1% in the decade from 1992-2001, while the S&P 500 had a return of 12.6%.[9] The extremely tricky part of investing is picking one of those top 20 funds one decade and then hoping the following decade the fund does not collapse like so many funds have proven to do (See Top 5 funds of previous chart). An investor will most likely be investing over dozens of years, so trying to select a winning manager for multiple decades in a row does not make much sense. To put it simply, trying to select a winning fund over multiple decades is not the kind of chance you should be willing to take when an all-market index fund is more likely to give you above average returns (even more so after all costs) and is less risky.
As we discuss the likelihood that an actively managed fund can outperform a comparable index fund, it is easy to lose sight of the fact that nearly all individual portfolios have more than one fund. Allen S. Roth, founder of Wealth Logic, LLC and author of How a Second Grader Beats Wall Street, conducted a Monte Carlo simulation in which he tested the probability of one, five, and ten funds beating the index over stretches of one, five, ten and twenty-five years (assuming 2% expense fee for active funds and 0.23% expense fee for index funds). The results are eye-opening:[10]
You can see that Roth claims the chance of one fund outperforming the index over 25 years is only 12%, consistent with Ferri’s earlier claim that the Vanguard 500 Index Fund outperformed roughly 88% of all U.S. general equity funds over a 25-year period. These results alone will make you think twice about investing in actively managed funds, but Roth explains that this simulation did not take into account two key factors: taxes and emotions. As explained earlier, index funds are quite tax efficient because they have a very low turnover ratio which means less taxes to the IRS .On the other hand, actively managed have a much higher turnover ratio, so even if you don’t sell part any shares, you are still paying higher taxes because the fund manager is buying and selling the assets in the fund at a much higher rate. Roth estimates that using a buy-and-hold strategy by owning index funds can save an investor roughly one percent annually in lower taxes. The other factor is human emotions. It’s human nature to pour money into a fund when it is doing well, and often times investors pull money out of a fund when it struggles. Unfortunately for these investors, they often miss out on fund gains due to market timing. Roth estimates that market timing costs investors 1.5 percent per year. Roth next performed another Monte Carlo simulation taking into account this 1.5 percent penalty for adverse market timing (in addition to the difference in expense ratio). The one percent tax penalty is not included in the simulation because Roth explains that “we will give it the benefit of the doubt that no one would be silly enough to do active investing in a taxable account.” The result of the second simulation is even more stunning than the first:[11]
The results speak for themselves. If you are a long-term investor, which you should be, why would you risk your future by investing in actively managed funds? As a serious investor, it is important to know the odds or you are at risk of putting a major dent in your nest egg.
Just to strengthen the argument even further, Larry L. Martin conducted a similar study in the early 1990’s about return probabilities in his article “The Evolution of Passive versus Active Equity Management” in The Journal of Investing. His results seen below show a direr situation for the active investor:[12]
Rick Ferri also set out to find the truth about return probabilities. Using 100 randomly selected actively managed equity funds (100 of the 260 that existed since 1976 – see earlier study), Ferri generated 10,000 portfolios and compared the return to an all index portfolio. Ferri only studied the 5-year time frame, but only 5% of 5-fund portfolios outperformed the benchmark by more than 0.5%. A more detailed look at Ferri’s study is shown below: [13]
These results are comparable to Roth’s and Martin’s study. It is hard to imagine why anyone would take the risk of selecting multiple actively managed funds in his or her portfolio.
The Experts
At this point you may be thinking “sure indexing might work for someone who knows little about investing but if I pay an advisor or ‘expert’ on investing to manage my portfolio, shouldn't he or she be able to beat the market? After all, they are experts.” That is a great question. Let’s take a closer look.
Allan Roth raises a good point on fund managers in his book How a Second Grader Beats Wall Street:
"We adults seem to buy into the expectation that our active manager is really good, so we will be among the few who beat the market. Of course, if my manager is so good that he can beat all the other managers, then why isn't he working for the billion-dollar investors?” [14]
Roth’s words remind me of this New York investment firm that has called me multiple times to silicate their big investing ideas trying to gain a new client. If this firm’s performance was as good as it said it was, why would it be calling a guy who just graduated college and works in a small town in northern Illinois? It seems like there would be clients lining up at its door if their performance was as good as promoted.
In the October 2003 edition of Money magazine, the magazine created “the ultimate investment club” by asking 24 of the top money managers to choose their top stock to form a 34 stock portfolio. One would think that the brightest minds could put together a portfolio that not only beat the market but crushed it. So how did this portfolio perform over the next year? A portfolio constructed by some of the brightest investment minds returned -2.4% while the U.S. stock market returned 11.5%.[15] That’s nearly a 14% difference! I do not need to tell you the effect that has on your money growth.
The next example of star fund manager inferiority is exposed in The New York Times in a 1993 experiment. The newspaper challenged five top professional financial advisers to select and manage a $50,000 portfolio made up of mutual funds that could beat an index modeled after the S&P 500. By October 1999, nearly six years later, not one adviser had beaten the index. While the index had an annual return of 21%, the average of the fund managers was a measly 13.8%. In other words, the average advisers portfolio would have grown to $112,000 in six years while $50,000 invested in the index would have grown to $164,000.[16]
Rick Ferri may have explained it best in his March 2012 issue of Forbes magazine when he proclaimed “My advantage is that I know what I don’t know, and unlike most investment advisers, I don’t have to make believe I know more.”[17] The point is, it is extremely difficult to beat the market after costs and even harder to know which fund managers will do it before they actually beat the market, so it is best to stick with index funds.
Active vs. Passive Investing: Costs
One of the main reasons that passive investing is the best strategy for long-term investors is the cost aspect of investing. Total costs an investor pays for a fund is often hard to see because the costs are built into the return on the fund most of the time. It is not like you get a bill in the mail that you have to pay. There are many costs that go into an actively managed fund. First there is the operating cost, or the expense ratio, that is attached to every fund including index funds. Many funds also have front-end or back-end sales commissions, a charge an investor must pay either when the fund is purchased or sold. There is also fund opportunity cost. A mutual fund often has a small percentage of its funds in cash reserves which have a much lower return than it otherwise would in stocks. Next, there are the transaction costs, or the costs associated with buying and selling stocks in the fund. Possibly the most costly of extra expenses are taxes (if held in a taxable account). Active funds tend to have a much higher turnover ratio than index funds, so even if an investor is not selling the fund, the fund manager is buying and selling stocks out of the fund which leads to more taxes. All of these costs take a huge chunk out of the return of the investor. On November 23, 1999, John Bogle gave a speech entitled “Equity Fund Selection: The Needle or the Haystack?” to The American Association of Individual Investors in Philadelphia that outlined the dramatic effect that costs can have on portfolio returns. Bogle examined the returns and costs associated with the average all-market mutual fund and an all-market index fund over the 15-year period. The chart below summarizes his cost estimates between actively managed mutual funds and index funds: [18]
From the years 1984-1999, the market returned 16.9% according to Bogle. However, if you back out all of the costs listed above, the average actively managed fund earned only 11.2%, a 34% reduction! On the other hand, the no load, low-cost, low-turnover all-market index fund would have return 15.8%, or 41% more than the actively managed fund. Bogle further explains the staggering difference between the two percentages in dollar amounts. If an investor started with an initial investment of $10,000 in 1984, the investor who put all of his money in the average actively managed fund would have about $49,000 after costs and taxes. You may be thinking that gaining almost five times your money after 15 years is pretty good, which it is! However, the key here is relativity. If an investor grew his initial $10,000 investment in a low cost, all-market index fund, that money would have grown to $90,000 net of costs. Now let me ask you, would you rather have $90,000 or $49,000? Even if an investor eliminated the tax cost because the investment is in a tax-free account, the investment would only grow to $70,000, which is still $20,000 of the index fund return.[19] Costs make a huge difference.
Human Rational Against Indexing
It is easy to see why more people do not index. Everywhere you look there are advertisements for a fund that has outperformed the Lipper average or a fund manager raving about his/her superior performance last year. Wall Street does not want you to know the truth because it will cost those big banks and investment firms lots of money! Do you remember all those extra fees that active funds cost you? Well most of that money is going to these firms. Simply put, the more these fund managers trade in their active fund, the more money they get and the less money the investor has. If an investor only holds index funds, these active managers don’t have a chance to collect all these extra fees, and therefore, less money in their pocket and more money in the investor’s pocket.
Another reason why investors believe they can consistently beat the market is because of our education system. It’s amazing that students go through school learning all about science, math, language, and history but what is one thing that every student will eventually need to know? Money management. When everyone starts their career, saving for retirement becomes a must but most have no idea how to start because they never had a basic class on investing at any level of their education. This strategy is very simple to learn and understand, but instead, “investors” rely on popular news outlets to tell us where to invest, which often leads to a much less satisfying investment return in the end.
Let’s go back to Allan Roth’s quotation when he urges investors to ask themselves, “if my manager is so good that he can beat all the other managers, then why isn't he working for the billion-dollar investors?”[20] It is a valid question, but humans in general don’t want to believe they are average or below average. They believe they can choose a wining manager because they put in the time and studied the numbers. It is easy to choose a manager who has a good track record the last ten years. As we showed earlier, though, past success is not an indication of future success, and it is very hard to tell who these top managers will be in advance. There will always be a group of investors who beat the markets. Always. Whether they beat the market because of luck or skill is another discussion (most academic research points to luck over skill), but as Greek shipping tycoon Aristotle Onassis once observed, “The secret of success in business is knowing something no one else knows.”[21] The fact is that the very large majority of investors do not have superior information, nor do they have the time and resources to try and find it. They read the paper, watch the news, and maybe even read a blog or two, but this is not superior information. This information is available to everyone. Thus, the best strategy for most investors is holding the entire market through low-cost index fund, and when it is time to retire, I would bet you are satisfied with your investment returns.
[5]
Sharpe, William F. “The Arithmetic of Active Management.” The Financial Analysts’ Journal Vol. 47, No. 1, January/February
1991, p. 7-9.
[6]Ferri,
Richard A. The Power of Passive
Investing: More Wealth with Less Work (Hoboken, NJ: John Wiley & Sons, 2011) 37-39
[8]
Bogle, John C. “Three Challenges of Investing: Active Management, Market
Efficiency, and Selecting Managers.” Client Conference, Boston, MA. 21 Oct.
2001.
[9] Bogle,
John C. “Three Challenges of Investing: Active Management, Market Efficiency,
and Selecting Managers.” Client Conference, Boston, MA. 21 Oct. 2001.
[10]
Roth, Allan S. How a Second Grader Beats
Wall Street: Golden Rules Any Investor Can Learn (Hoboken, NJ: John Wiley
& Sons, 2009) 97-99.
[11] Roth,
Allan S. How a Second Grader Beats Wall
Street: Golden Rules Any Investor Can Learn (Hoboken, NJ: John Wiley &
Sons, 2009) 99-102.
[12] Larry Martin, “The
Evolution of Passive versus Active Equity Management,” The Journal of Investing (Spring 1993) : 17-20 via Power of Passive
Investing
[13] Ferri, Richard A. The Power of Passive Investing: More
Wealth with Less Work (Hoboken, NJ: John Wiley & Sons, 2011) 87.
[14]
Roth, Allan S. How a Second Grader Beats
Wall Street: Golden Rules Any Investor Can Learn (Hoboken, NJ: John Wiley
& Sons, 2009) 9.
[15]
Roth, Allan. “Beating the Market.” The
Colorado Springs on the Web. 19 Nov. 2004. 27 Oct. 2012. <http://www.daretobedull.com>.
[17]
Ferri, Richard. “Why Smart People Fail to Beat the Market.” Forbes March 2012. 27 Oct. 2012
<http://www.forbes.com>.
[20]
Roth, Allan S. How a Second Grader Beats
Wall Street: Golden Rules Any Investor Can Learn (Hoboken, NJ: John Wiley
& Sons, 2009) 9.
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