Trying to Beat the Market is Futile - and Fleeting

By investing in index funds you surrender your quest to be on top of the market, knowledge-wise. Daring to compete on behavior versus talent is not an easy thing to do.

By investing in index funds you surrender your quest to be on top of the market, knowledge-wise. Daring to compete on behavior versus talent is not an easy thing to do. But it gets easier when rewards for this humility begin to appear – once your focus on behavior (discipline) leads to improved success in managing your portfolio.

Can't Beat 'Em

Beating the market is extremely hard to do. Accounting for what’s known as “survivorship bias” (the attrition rate of poor performing mutual funds), over a recent 15-year period, roughly 92% of large-cap funds lagged the yield of a simple S&P 500 index fund. Mid-cap and small-cap funds lagged their benchmark indexes even more - roughly 95% and 93%, respectively. In short, the odds that you’ll do better in an actively managed domestic fund (versus an index fund) are about 1 in 20. That’s why I dared to be average years ago!

‍Certain “friends” suggested that, in my case, being average probably came quite naturally. And I agree. I’m not the proverbial sharpest knife in the drawer, but I am very disciplined when it comes to investing. The professional investors I have to compete with (I call ‘em Wazoos) are very smart, very hard-working, and they number in the thousands. How can I expect to match up with this brainy crowd in time and effort spent?

A Slight Edge

An index fund simply seeks to match the performance of a stock index (e.g., the S&P 500) by buying shares in all of the companies in that particular index. Studies show that index funds beat the vast majority of actively-managed funds over time in large part by keeping the costs of investing low. I particularly love that feature, but it’s not the main reason many small investors like myself gravitate toward index funds. Finally, we have a tool that plays to our strength – in my case, at least. Its separates behavior from the Wazoos’ superior knowledge of the marketplace. In short, it gives small investors a slight edge, daring to be average, as opposed to working their collective butts off trying to compete with the talented Wazoo crowd.

Average is "In"

Next to saving, one of the most difficult results to accept as an investor is daring to be average. But it’s an index fund’s essence…its basic fundamental. Think about it, if you invest in a Total Stock Market Index fund, or less broadly, an S&P 500 Index fund, you’ve deliberately chosen to be satisfied with the broad market’s yield. “Why,” you ask, “would I want to just be average?” Truth be told, you’re not just being average. Study after study of index (passive) fund results show that over time, they outperform managed (active) funds. And those occasional fund managers that outperform index funds aren’t necessarily the same fellows and gals year-in, year-out.

In short, today’s hero could just as easily be tomorrow’s scapegoat.

Do Nothing

What you soon learn is that doing nothing is often the best practice once you’ve established a pattern of regular investing (i.e., dollar-cost averaging) into appropriate index funds (occasionally adjusting for risk as circumstances change). Like John Bogle and other conservative icons have so often commented, “Don’t just do something, stand there”. Of course, many Wazoos will recommend that you do just the opposite. Gotta keep those transactions (fees) flowing. In short, they often advise, “Don’t just stand there, do something”.

Hard Lessons

After throwing in the towel on time and effort, I soon discovered that I was equal to the task when it came to patience and discipline. Call it being lazy. Call it daring to be average. Call it what you want, but I learned some valuable lessons in the early 80s. Being part of the thundering herd didn’t appeal to me. As a part-time, break-even kind of investor… an amateur… I had to find a new gig to stay in the “yield” game with the Wazoos. That search led me to John Bogle’s Vanguard and his, at the time, much maligned index funds. Life quickly improved – became less stressful and certainly more rewarding.

Hocus Focus

What I’m suggesting is that once you’ve dared to be average by dollar-cost averaging into index funds, your remaining and constant challenge is to focus, focus, focus on your behavior pattern – be better than the Wazoos at doing nothing. And it ain’t that easy being patient, folks! Doing nothing while a Bear Market is nipping at your butt goes very much against human nature’s survival instinct.

I’m proud to say I stayed the course during both the Great Recession of 2007-2009 and today’s Covid-19 Recession. I endured those major downturns, plus others, by doing nothing except continuing to invest the same amount of money in the same funds on the same day of every month (I’m crossing my fingers about the Covid-19 affair… it ain’t over yet). In any event, those cheap units patient investors acquire during the bad times do wonders for portfolios during recovery. Admittedly, it wasn’t always pleasant reviewing my monthly statements during those grim times, but I still have a few strands of hair.

However, a couple more fell out this past week.