If you can't beat it, maybe you should join it!

You Can't Beat the Markets

by Rick Kahler


Related Articles

Where Should I Put My Savings to Get the Best Return?

Could Acquired Needs Theory Save You Money?

Choosing Beneficiaries for Your Retirement Plans

When it comes to investing, it's a losing proposition to try and be anything better than average. I was recently reminded of this important investing precept when I attended a presentation by Ken French, a noted professor of finance at Dartmouth College.

"The theory is institutions are smarter than 'dumb' individuals and can add value," said French. "That is simply not true." His research has found that institutions are no better at trying to beat the market than individual investors. When you pay someone to do better than the market, French told us, "You should expect to lose. It's really hard to identify the great managers. You are wasting your time and money trying to beat the market."

If there's no point in trying to beat the market through "active" investing, what is the best way to invest? It's through "passive" investing, which accepts average market returns. You need to reduce expenses, diversify your portfolio into index funds of various asset classes, minimize taxes, and exhibit discipline.

  1. Reduce expenses. Passive investing generally costs around 0.20% a year in fees, compared to around 1.35% for active investing.
  2. Diversify into index funds. Simply select an index in the asset classes you want to hold. The inherent strategy of the index will determine when to buy and sell. For example, the inherent strategy of the S&P 500 is to own a fraction of the largest 500 companies in the US. Every June, those companies that fell out of the top 500 largest are sold and those that made it into the top 500 are purchased.
  3. Minimize taxes. The limited buying and selling of passive investing tends to reduce investment-related taxes.
  4. Exhibit discipline. Relying on the inherent strategy of an index fund puts some distance between you and buying/selling decisions, making it easier to maintain your investment discipline during market fluctuations.
  5. You may be thinking that, if "passive" is the way to go, you might as well make things even simpler. Why not just put your retirement money in the bank and forget it? While you can certainly do that, the results may be disastrous. If you want more than just Social Security for your retirement, you need your money to grow.

calculator iconCalculator: How much income will my retirement savings provide?

Consider this. In 1913, nine cents bought a quart of milk. In 1963, the same nine cents bought a small glass of milk. In 2015, nine cents bought seven tablespoons of milk. Clearly, putting money under the mattress doesn't work for the long term. The culprit of the declining purchasing power of that nine cents is inflation. The moral of this story is to make sure your money grows at least as fast as inflation.

That requires investing it. For example, it would require $13 today to equal the purchasing power that $1 provided in 1926. Had you put one dollar in the bank in 1926, you would have $21 today. Having invested the dollar in long-term bonds would give you $132. However, invested in the S&P 500 Index (stocks), you would have $5,386.

Does that mean you should invest all of your retirement assets in stocks? If you are one year old, probably so. If you are 60 years old, probably not. For most of us, a mixture of index funds that include many asset classes like global stocks, global bonds, global real estate, and commodities is the best strategy.

Research supports the value of diversified passive investing as long-term strategy. According to a study by Dalbar, Inc., average passive investors earn 3% to 4% more annually than average active investors. Over time, that makes a huge difference.


Rick Kahler

Rick Kahler, MSFP, ChFC, CFP, is a fee-only financial planner and author. Find more information at KahlerFinancial.com. Contact him at Rick@KahlerFinancial.com or 343-1400, ext. 111.

Take the Next Step:

  • Make sure you're getting the best CD rate. Use our simple CD tool to find out. It's completely private, easy to use and you'll know what rate is available to you in seconds!
  • Get the interest you deserve! Compare money market and savings account rates with our best rate finder. It only takes a minute and your privacy is completely protected.
  • Stop struggling to get ahead financially. Subscribe to our free weekly Surviving Tough Times newsletter aimed at helping you 'live better...for less'. Each issue features great ways to help you stretch your dollars and make the most of your resources. Subscribers get a copy of Are You Heading for Debt Trouble? A Simple Checklist And What You Can Do About It for FREE!

Share your thoughts about this article with the editor.




Get Out of Debt
Stay Connected with TDS







Do you struggle to get ahead financially?

Surviving Tough Times is a weekly newsletter aimed at helping you stretch your dollars and make the most of your resources.

Debt Checklist
Subscribe

And get a copy of Are You Heading for Debt Trouble?
A Simple Checklist and What You Can Do About It
for FREE!


Your Email:



View the TDS Privacy Policy.

Get Out of Debt