Money Saving Tips
Why Saving Money is So Hard – And What To Do About It
July 1, 2018

Why Beating the Market Is Not What It Is Made Out To Be

When an investment professional tells you that one of the mutual fund in your portfolio has beat the market for 5 years in a row, it is supposed to make you feel good about your choice of investment. After all, isn’t beating the market a good thing? If your investment is beating the market, you are better off because you made a better return. And consequently you have a better chance to meet your financial goals. That is what most investment manager advertising will tell you, but is that really true? Should you be only focused on products that have outperformed the market? Are they the only right investment choice for you? To answer that question, let’s look at what “beating the market” is and why the concept is so popular among the investment profession.
What Exactly is a "Market"
Let’s start with the most basic question. What is “the market”? The market in its widest sense is the collection of all valuable assets in the world. In other words, it is something that is impossible to measure all at once. It is easier to take a slice of that one enormous market and call it “the market”. And there are as many slices of this market as there are people willing to make them. You can see it on your iPhone STOCKS app these days. Your phone will tell you each day if NASDAQ, NYSE, or DOW J was green or red (went up or down) for the day and by how much. These are the best known markets in the world along with the S&P 500 and a few international ones. The market then is an arbitrary collection of assets that are put together to represent a really big collection of assets we cannot get our minds around.
Money is the product of the financial industry. And as with any product, if you want to charge a premium price, you’ve got to have a better product than your competitor. How do you do that in the stock market? You build a product around a benchmark and figure out how to “beat” it. You call it active investing and charge a hefty markup in the guise of a management fee. There is a lot of art to it and a lot of well-paid analysts and portfolio managers looking for ways to eke out a couple percent more than the benchmark they themselves chose to best. I am oversimplifying of course. There are many terrific companies and fund managers out there who have consistently delivered solid returns to their customers. But do you care if they are better than their benchmark? Plus, are you better off with these products after their creators pay themselves handsomely for a job well done at your expense? The answer is No.

If a market is just someone’s view of “the market” then who decides what goes into it? The companies that make up these “markets”! For example, the company that makes S&P500 - The S&P Dow Jones Indices, decides by committee which companies should move in and out of this market. It publishes over 1 million “markets” more commonly known as indices or benchmarks.. The word benchmark here is key to understanding the whole concept of “beating the market”.
... Money is the product of the financial industry. And as with any product, if you want to charge a premium price, you’ve got to have a "better" product than your competitor..
Saying that an investment product is better than “the market” is like saying that a your brand of vanilla ice cream is better than “the vanilla ice cream”. If I want to sell you premium vanilla ice cream, I have to convince you that mine is the real deal. But does anyone know what “the vanilla ice cream” is? Can you include all the brands and recipes in the description? I invariably have to pick a few kinds and call them the real thing – my benchmark. Then I have to decide how what I make is better than my chosen benchmark. Is it creamier, sweeter, richer? Does it make the best sundae you can think of? I have to pick and make sure you hear me loud and clear. As long as you believe me and pay me for my efforts, I am in business! Same with investing.
So What Should You Do?
When it comes to investing, simple and straightforward is better than fancy and complex. If you need a fancy brochure and a roomful of people in suits to explain their “strategy”, I say – stay away! No complicated model, methodology or research will beat a simple investing strategy that focuses on your time horizon and goals. No one product or investment manager alone will deliver you the retirement of your dreams. Don’t try to beat the market, make it work for you instead.

Click here to read how I recommend investing in the stock market to achieve your personal goals.

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