In a previous post, I said that when it comes to investing, it is better to be lazy and cheap. More specifically, I argued that low cost index funds worked best and that you should have a “hands off” approach, ignoring the daily ups and downs of the stock market. Apparently, I didn’t go far enough and the best investing style is not “lazy and cheap” but “dead and forgetful.” You see, Fidelity did a study of their accounts to determine which investors performed the best. They found that the best performing accounts were from investors who were DEAD! In second place were investors who had FORGOTTEN they had accounts at Fidelity.
Basically, what this study from Fidelity teaches us is that we should keep our hands off investment accounts. The best investors did nothing and were of course not buying and selling. Too often, we think that we can time the market and buy and sell based on our analysis. We’re usually wrong. Not only are we wrong, but buying and selling stocks will often increase transaction costs and is tax inefficient.
Back before I was mainly an index investor, I also tried chasing stock returns. In the spring of 2000 while I was still in college, I remember there being this internet stock craze. Everyone was making money investing in dot-com companies. Everybody thought they were experts because every stock they bought went up. I begged my father to help me open a stock trading account and to help fund a portion of the account. Unfortunately for me, I decided to join this frenzy exactly when the dot-com bubble was about to burst and lost half of the money in that portfolio. My timing was impeccable.
In the mid 2000s, I purchased shares of stock in Starbucks. I mean Starbucks was everywhere, they were expanding quickly and everybody was buying Starbucks coffee. People would joke that you could open a Starbucks store within a Starbucks store and that store would still be profitable. After the 2008 recession, I sold all my shares of that stock at a loss when stocks were tanking and the economy was in the midst of a terrible recession, thinking that most people would shun $5 lattes with money being so tight. A bull market took place not too long after I sold the stock and the price of that stock has more than tripled from the price I sold it at. I could list many more instances where I lost money on buying individual stocks, but this post will run too long! I have also made money on individual stocks, but the losses outweigh my gains.
Maybe you’re just a horrible stock picker. Why don’t I just invest with the pros?
I’m sure many readers may be thinking that, and yes, it is very likely that I am bad at picking stocks. But is entrusting your money to the professionals the best alternative? In 2007, Warren Buffet made a bet of $1,000,000 with a collection of five hedge funds of funds chosen by New York-based Protégé Partners (the winner to donate the money to charity). Buffet bet that a low-fee index fund would beat the expensive hedge fund chosen by Protégé Partners over 10 years. Buffet invested in Vanguard’s 500 index fund which is an index fund that tracks the S&P 500. During the first four years of the bet, Buffet was trailing the hedge fund managers, but has since pulled ahead…WAY AHEAD. At the most recent Berkshire Hathaway shareholding meeting, he revealed that The group of hedge funds are up a cumulative 22 percent, while the S&P 500 has advanced close to 66 percent. He admitted that it wasn’t that the hedge fund managers were bad at picking stocks, it was just that the fees charged by the hedge fund are so high it drastically cuts into the returns. On the other hand, index funds, especially Vanguard’s index funds, have very low fees.
Let me share a few quotes from Buffet which I found fascinating:
“There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities.”
To really drive home his point, he referred to two investment managers employed by Berkshire Hathaway, and said that they each manage $9 billion of the company’s money, and that if they were compensated as much as hedge fund managers usually are, “they’d be getting $180 million each merely for breathing.”
Buffet also said:
“By periodically investing in an index fund… the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
And one last quote, not from Buffett but from Princeton professor Burton Malkiel, who wrote in his book, A Random Walk Down Wall Street
“A blindfolded monkey throwing darts at a newspaper’s financial pages could beat most experts,”
Resources I recommend if you want to learn more about index investing:
Go to the Bogleheads wikipage which is investing advice inspired by Jack Bogle, creator of index funds. You can also check out the Bogleheads book:
I also recommend reading the Stock Series on Jim Collins’ personal finance blog or get his recently published book:
Are you afraid of investing in the stock market? Do you invest in index funds?
Haha, well said Andrew. Just like how Jack Bogle say how investors are paid to not do anything…..and just let the market averages make you money. While I think the current market multiples, in the US, are nuts…….Bogle’s sage wisdom has some merit. I hope your week is finishing up well
-Bryan
Income Surfer recently posted…What to make of the Tesla-SolarCity deal?
Bogle is a wealth of knowledge. I’m just going to stay the course. Time in the market is more important than timing the market.
Wow, I like that! I heard this stat a while ago and it made me feel even better about being lazy haha. Love The Simple Path to Wealth, too!
FF @ Femme Frugality recently posted…ABCmouse–Biggest Sale Ever!
Yes, sometimes being lazy is just fine!
Good advice on the morning of Britain voting to leave the European Union. Many investors may try to buy during the tip (S&P 500 is predicted to fall by as much as 5% this morning as I write) and other investors will try to sell before the plunge. Truth is nobody knows what will happen and those not paying attention to the market will do best, although hopefully they don’t need to be DEAD!
Yes, my timing is impeccable. I honestly didn’t hear what was going on with the stock market today. It’s one of the good things about being a “buy and hold investor”…I have a lot less stress.
“the best performing accounts were from investors who were DEAD”
That is just…incredible. And kind of hilarious. And a great reminder to stop checking and analyzing my portfolio every day, because it’s pointless.
Kristin Wong recently posted…How I Turned My Side Gig Into a Profitable Business
Yep! I have a co-worker who is checks his stocks obsessively! That’s just too much stress. Not to mention market timing rarely works out.
I almost think of stock picking like poker, except your odds may be better in poker…there is a lot of luck involved. There is so much information and understanding of a company, their competitors, their future outlook, their industry, economic/social/technology trends, etc., that I’m not surprised that a huge majority of people are bad stock pickers. You won’t get rich investing in index funds (at least not quickly, maybe over time), but you likely will outperform picking individual stocks.
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Yea, I think that’s why many people are lured in by picking individual stocks. They want to hit that homerun and get rich quickly rather than over time. Interesting comparison with poker, I’m not a big poker player so I can’t say whether I agree or not but I just so happened to read a comment on a post about index investing and Jim Collins who apparently is a fan poker had this to say: http://jlcollinsnh.com/2013/02/05/stocks-part-xv-index-funds-are-really-just-for-lazy-people-right/#comment-1908
“The advantage of Vegas poker is, unlike all the other games, you’re not playing against the house advantage. But the tables, as you point out, are populated with very, very dangerous sharks”
This is probably a little out of context so you can check out the full conversation if you want.
I used to be afraid of investing, but the urge to invest and get results was greater so I kept studying until it’s gone and I felt ready to invest. That decision was worthwhile and I am glad that I did.
Jayson @ Monster Piggy Bank recently posted…Sickness Strikes AGAIN!
The fact that the best returns were from dead investors or investor who had forgotten about their account also links to one of Buffett’s quote, that “Berkshire’s preferred holding period is forever”.
Holding that Starbucks stock a few more years would have been pretty sweet!
But I’m with you in general, Index investing is probably one of the most ‘idiot-proff’ investment methods.
What indices do you invest in?
Nick – TheMoneyMine recently posted…Money Is So Cheap, Has the World Gone Crazy?
Most of my IRA is in Vanguard’s Target 2045 so I’d say mostly Total Stock Market and Total International Stock Market. And with my deferred compensation plan I have some in VINIX/VMCIX/VSCIX and international index fund run by the deferred compensation plan which tracks MSCI EAFE. You’re right about holding the Starbucks stock but I once held another stock which I bought at a low price and thinking at worst there would be an acquisition since it has a valuable brand and real estate holdings…I held on until they filed bankruptcy!
I too use a low expense index fund (S&P 500)… Though it’s honestly a tiny fraction of my investments.
I don’t really like stocks though.
Eric Bowlin recently posted…How to Take Advantage of the Brexit
Yes, I know you’re more of a real estate guy. I’m trying to invest in that area too but it’s a little more difficult imho. Will love to learn more about your strategy.
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Yep, when we’re ready to invest in something other than IRAs… I’m definitely taking a hands-off approach and going for something low-fee. Luckily, I’ve never thought I could beat the market or otherwise pick winners. Too much work in researching each store and, well, guessing the future.
Abigail @ipickuppennies recently posted…Avoiding the “Oh well” mentality
Nothing wrong with investing in your IRA…actually IRA and employer’s deferred compensation plan (457) is mainly where I invest. Do you own index funds in your IRA?
I guess I would be one of those in the dead/forgotten category because I only look at my account when I’m ready to up the contributions. For one, I hate numbers and looking at all that stuff racks my nerves. Second, I know the set it and forget it strategy is working to my advantage and I’m not even doing anything about it. I’ll take the latter approach because it’s much less stressful. Awesome post, I’m going to have to share this!
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I don’t believe investing is not that hard if you do just a little bit of research and knowing what you want instead of letting somebody else do everything for you. It’s always good to have total control of your hard earn money.
Aaron @Income Honcho recently posted…7 Tips to Keep Motivation High While Running Your Own Business
Which one do you think is better? lump sum investing or dollar cost averaging?
Kelly recently posted…7 Answers to the Most Frequently Asked Questions About Online Trading
Ultimately, I don’t think it’ll make that much of a difference, but if you’re scared that the market will drop right when you invest, then you can go with the dollar cost averaging method.
Brilliant post. When it comes to investing, just pretend you’re dead or forgetful.
I rebalance way too often, which is probably my biggest flaw. I’m not letting each asset class take its full run when it’s doing well.
Done by Forty recently posted…Mortgages, Student Loans, and Good Debt
How often is too often?
Hey Andrew,
I agree, for 95% of people the cheapest index fund is definitely the way to go. We’re happy to pick our investments, we want to pick the long term dividend payers (which in Australia are hard to find). In time, an S & P fund will find its way into our portfolio.
Tristan
DividendsDownUnder recently posted…Saving for the future: June 2016
Good luck with your strategy!
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I am wary of investing in certain funds, but what I can get from this post I see that they are less risky investments. Thanks for writing!
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