Investing can be a be a powerful tool to aid your financial plan. Think of it as a disciplined savings strategy, not something to make you rich overnight- looking at you, Robinhood traders. Don’t overthink it and keep it simple for the best results.
The data shows that trying to pick the best stocks doesn’t work for many of us. From 1996 through 2015, Dalbar Inc conducted a study that showed the S&P 500 index (the largest 500 American companies) returned ~10% annually (right in line with long term expectations), while the average retail investor’s (average Joe’s like you and me) return was a paltry ~5%. Even institutional managers who spend all day trying to find the best companies tend to fail. A SPIVA® report showed that 90.46% of professional managers failed to beat the S&P 500 index over a 15 year time horizon through 2019. I’m sure if you added in trading fees and taxes, the gap would be even worse.
So stop trying to pick the best ones and just construct a portfolio that mimics the index. You’ll be a diversified investor and your returns will fall within the expected averages over the long term (stocks earn 10%, bonds earn 5%). As funny as it sounds, relinquishing control of your investments actually lets you be in control of your balance sheet and financial plan. Now you won’t sound as cool as your friends bragging about their hot stock, but you will be better off than them over the long term.
When I say “just buy everything”, that doesn’t mean go out and buy a share of every single company in the entire world. Thanks to exchange traded funds (ETFs) and mutual funds, it’s incredibly easy to get global stock market exposure with just one to three holdings for very cheap.
The chart below (provided by JP Morgan Asset Management) shows annual returns across different asset classes for the last 15 years. You’ll notice there are no patterns and the asset class that performs the best each year changes. Maintaining global exposure allows for a smoother investor experience thanks to the diversification of risk (see the asset allocation line) to allow you to feel more confident and on track with your financial goals.
Investing is supposed to be a strong tool to enable financial success. A lot of times we do too much and investments deter us from reaching financial success as soon as we should have. Allow the market forces to work for you and maintain a diversified global allocation to take full advantage of investing. Sure you won’t be able to brag about how much better you are than the benchmark, but that’s not what investing is about. Investing is a way to realizing realistic goals. Keep it simple so that your life is easier and you’re happier.
Just remember, I’m not your financial advisor so the information may or may not best apply to your situation and you should get formal advice prior to doing anything. The information/data that is shared should be double checked by you and any conclusion that is driven based on past data is not to be interpreted as my advice for your future. I will do my best to only write what I think is true and right, but mistakes happen and we’re all learning together – this is meant to be a conversation. My employer has nothing to do with this blog – in fact, they’re probably upset I’m writing here instead of working.