Yesterday I told you about my roommate who fancied himself some kind of stock picker extraordinaire. And I told you how he spent countless hours “researching” his stock picks and lost a lot of money in the process. Frankly, he would have been better off had he never invested a cent.
But such a fate will not befall you, dear readers, for I will tell you a superior way to invest that will save you time and make you money. And the first thing you should know is this: it is very, very, very unlikely that you will beat the market, consistently, year-over-year.
🤷 Odds Are Very Low that You Will Beat the Market.
Don’t believe me? Read below. The majority of stocks do not even beat Treasury bills, which yield much lower returns than the stock market as a whole, and the vast majority of professional stock pickers do not beat the market in any given year, much less routinely. I’m not just talking about your college buddy who dumped his life savings into Snapchat stock. I’m talking about professional, well-paid money managers. Check these articles out:
- “CNBC TV personality and ‘Mad Money’ host Jim Cramer has built a lucrative career as a stock picker, but a new analysis of his charitable fund—a personal stock portfolio he co-manages that the financial website he founded has built a subscription service upon—shows he doesn’t beat the market.” Marketwatch. Jim Cramer Doesn’t Beat the Market. May 16, 2016.
- “If you want to be a stock picker, you had better be a truly exceptional one because the alternative is not pleasant. While stock markets in aggregate hugely outperform bonds, especially one-month Treasury bills, the story when it comes to individual stocks is a lot more daunting. Only 42 percent of stocks, over their entire lifetimes, provide a higher return than one-month Treasuries, and more than half provide negative lifetime returns, according to a new study which looked at U.S. stocks from 1926 to 2015.” Reuters. Individual Stocks Don’t Even Beat Treasury Bills: James Saft. February 1, 2017.
- “Fewer than 1 in 5 [professional stockpickers] beat the S&P 500 in 2016, driving half a trillion dollars of investors cash into indexes, primarily through passively managed exchange-traded funds.” CNBC. Stock Pickers Beware: Charlie Munger Thinks You’re in Big Trouble. February 15, 2017.
These are people with advanced degrees in finance and investment analysis who are paid full-time to pick stocks, and even they can’t beat the market. So what makes you think you can, year-over-year?
Let’s give you the benefit of the doubt and assume you pick your stocks and beat the market this year. Congrats! Now you have to do it again next year and the year after that and the year after that in order for all of your “stock picking skills” to be worth it. Given the fact that fewer than 1 in 5 professional stockpickers were able to do that in just one year, I’d say that their — and your — chances of repeating this feat for the next 30 or 40 years are virtually zero.
🙋 If You Can’t Beat It, Join It.
So since you can’t reasonably expect to beat the market, what’s the solution here? Join it.
Find a system whereby you can invest the money you make into a platform where you can match the market. “Set it and forget it,” so to speak. There are many ways of doing this, but I recommend Betterment.
Betterment has developed an algorithm in which you answer a few simple questions — such as your goals, your income, how much you have to invest, and when you want to retire — and then this algorithm invests your money for you. And it’s not based on emotion or the next big stock pick but rather on a statistical analysis of stock market performance over the last 100 years. I don’t know about you, but I’ll take that over my gut feeling.
And a great thing about Betterment is there are no minimum account balances! You can get started today here just to see how you like the platform. Even if you want to try your hand at stock picking, I would still recommend you set up a Betterment account in addition to your brokerage account and then perhaps see which one performed better after a year or two.
Here’s a short video on Betterment or your viewing enjoyment.
💰 And Make More Money in the Time You Would’ve Spent “Researching” Stocks.
Let’s say you have $100,000 to invest, and you beat the market by 2% this year. Congrats; you’ve made an extra $2,000 this year than you would have made had you just “joined” the market through Betterment or some other system you develop. But how much time did you invest “researching” your stocks? Could that time have been spent making you even more money than $2,000? Probably.
Most of us can do something that will earn us far, far greater guaranteed returns on our time than “researching” stocks. For me, that “something” is this blog. What can you do with your time?