When you turn on CNBC, investing is exciting. Jim Cramer energetically analyzes stocks and economic trends and pushes a button that tells us to “buy buy buy” or “sell sell sell.” A scrolling live ticker at the bottom of the screen pulls us up and down like a roller coaster as prices change with news, earnings releases, and an occasional scandal.
But buying and selling quickly is more akin to speculating, according to legendary investing author Benjamin Graham. Instead of active trading, Benjamin Graham (and his university student Warren Buffett) suggests investors take a long-term, numbers-driven approach. It isn’t very exciting. If your investments are boring, however, it might mean you are doing something right.
Professional investors struggle to beat the market
According to an annual report from S&P Dow Jones (PDF download link), actively managed funds have underperformed the S&P 500 for the last nine years in a row. Professionals who spend long work days analyzing and picking stocks are wrong more often than they’re right. If we can only do it part-time, odds are we will do even worse!
Large actively-managed mutual funds and ETFs are compared to index benchmarks like the S&P 500, Dow Jones Industrial Average, NASDAQ Composite, and thousands of others across the US equities markets (often called the stock markets).
One benchmark that tracks the overall market is the S&P 500 Composite 1500 index. In 2018, 68.83% of US stock funds lagged this index. But just because funds can’t beat the markets doesn’t mean you can’t win with investing.
The market as a whole performs very well over time
The S&P 500 index represents 500 of the biggest public US companies. From its inception in 1926 through the end of 2018, this index returns an average 10% per year. In the best years, it has returned over 30%. In the worst, it has experienced losses in the 30% range. But when you look at the average performance over time, the S&P 500 is a great investment.
Most of us don’t have enough cash lying around to buy all 500 stocks in the S&P 500, but we can invest in those 500 stocks at once. Index funds, including popular S&P 500 index funds, allow you to invest in all of those underlying assets at once.
To make this work, investment fund managers take $100 here, $500 there, and sometimes millions of dollars from different investors. Using those funds, they buy the underlying stocks and keep the fund updated to reflect the performance of the index. Because they are simply following an existing investment plan, index funds charge a lot less in fees than actively managed funds as well. That’s a win-win!
At Evati, your portfolio is built using highly efficient and low cost ETFs. Keeping fees low and following the performance of the markets may be boring, but it’s historically the best way to go.
Exciting strategies rarely work
Active trading, day trading, options trading, and other “investing” strategies are fun and exciting. Just like standing at the blackjack table in Las Vegas, there is a good chance you’ll make a winning bet if you play your cards right. But also like Las Vegas, there’s a very good chance you’ll come out with a loss.
Your money is too important to gamble with. But if you take a slow but steady approach to investing and resist the urge to buy and sell as the tides turn in the markets, you are likely to come out ahead in the long-term.
Keep your money boring for the best long-term results
When it comes to your money, boring is a good thing! Don’t stress over the performance of a single stock every hour. Don’t worry about checking into your portfolio every day. Set things up to run on autopilot, or let Evati handle that for you.