I’m not saying you may not do well trying to beat the market, though not trying is often the wisest course. (On average, we can’t all be above average. The more time and money one spends trying to beat the average, the bigger the “handicap” that must be overcome just to do as well as those who don’t try.) Not long ago, I even laid out my top 10 reasons why you might NOT want to invest via low-expense, no-load mutual funds, even though that’s surely the best course for most people.
(Full disclosure: little of my own money is in mutual funds, and none of it in the Vanguard Index funds I’ve so long recommended. For the most part, I enjoy making my own mistakes.)
But there are just so many reminders of this basic fact: that most of the time you’ll do well — or at least better than most people who are trying harder — just “buying the average” via a low-expense index fund.
Latest example? This month’s Smart Money Magazine is emblazoned: THE SEVEN BEST MUTUAL FUNDS FOR 1997.(My first thought: what outfit conducted the focus group that determined “seven” would sell better than “ten?” Or maybe it was just good editorial instinct. We’re tired of “ten.” Ten is a cliché. Ten’s been done — to death. Ten is not particularly lucky. And ten is perhaps a tedious lot of choices to muddle through in these days of instant soup and widespread downsizing.)
So the “seven” part of the deal I was fully in synch with. But the rest? C’mon. The guys at Smart Money are every bit as smart as I am, which means they know as well as I do this is basically just good entertainment, good marketing, part of what makes the world go round. And little more.
To their credit, Smart Money did just what they should as part of this endeavor. Namely, they showed the results of last year’s picks. In a time frame during which the S&P 500 returned 27.85% (this was the benchmark they used), all seven of THE BEST FUNDS FOR ’96 did anywhere from considerably to dramatically worse. Not one of the best came close to the S&P (or, therefore, the Vanguard Index Trust). The best of the seven managed 20.86%, the worst returned less than 1%.
I have no doubt Smart Money’s picks for ’97 won’t have such an awful year relative to the S&P. Who knows: they could even match the S&P or, it’s certainly possible, exceed it. But could they exceed it by enough to bring Smart Money back up to even with the S&P for the two years? My guess is you could buy Smart Money and follow its mutual fund advice forever without meaningfully justifying the price of the magazine on this score, simply because the funds they choose will normally have a bigger expense-ratio handicap, on average, than the low-expense, no-load index funds, and therefore very possibly trail them.
This then raises the issue of, “Well, what if everyone invested only in index funds?” What if no one picked stocks, or funds that picked stocks?
I grant that if that day ever approached, the “inefficiencies” in the market — which are already there and create opportunities for the nimble (see, for example, my comment on spin-offs) — would become so glaring they would provide opportunities even for the lame. Which is why we’ll never get that far. There will always be a balance between people like me willing to try to beat the averages, some succeeding, most failing, and those taking the boring, prudent course.
Quote of the Day
If you ask me to name the proudest distinction of Americans, I would choose the fact that they were the people who created the phrase 'to make money.' . . . Men had thought of wealth as a static quantity, to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were the first to understand that wealth has to be created.~Ayn Rand
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