If you’re new to investing in the stock market, the terminology and numbers might scare you at first sight. Fancy math, charts with patternless lines, PhDs in fancy suits. I have news for you: it’s all a facade. The secret is that over 90% of these guys with their quantitative models and algorithms can’t even beat the benchmark index with any consistency. If you’re out trying to get rich trading marijuana stocks and alt-coins, the data shows that the odds are so stacked against you that it’s not worth the time or the stress. The failure rate is around 98%. Here’s a quote from famous investor Warren Buffett:
“The 21st century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners — neither he nor his ‘helpers’ can do that — but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
The reason why active managers are so bad at doing their job has nothing to do with their intelligence. In fact, it’s the most brilliant guys that are susceptible to failure at short term investing or trading. The reason is that human nature and trends are so unpredictable and random in the short and medium term that it turns stock picking into nothing more than guessing using fancy math and fundamentals. If you throw in human emotion, in only compounds the problem further. The market has a way of exploiting ego and eating alive the folks that are 100% certain of their picks in a completely uncertain environment. Here’s another quote from Uncle Warren:
“By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
So how do you make money in what seems like a floating casino? It’s pretty easy, actually. Just keep it simple. Let’s use my mother, for example. If you asked her to give you the ticker of any company in the S&P, she probably couldn’t do it. She’s also made, on average, about 12% annually over the past 15 years. Past performance is not indicative of future returns, but on average the market returns around 8.5% annually. The key word here is average. There will be bumpy roads ahead, and the headlines will not help.
Here’s a chart of the overall market since 1900. Through thick and thin, we’ve weathered every war, crisis, disease, political scandal, and bubble to date. That’s not to say there’s no significance in the issues that I just previously listed, but they are issues that aren’t capable of knocking the overall market off of it’s long term trajectory. They are issues that are of tremendous value to media outlets in efforts to catch eyeballs and clicks while at the same time stirring up some entertaining water cooler material.
A solid investment strategy really revolves around keeping it simple and detaching yourself from the short-term noise. Buying a simple index fund, or portfolio of safe large cap stocks on a recurring basis is a proven investment method. Whether it’s on a monthly or quarterly basis, with $100 or $10,000, the return on your investment over a longer time frame will surprise you, and there’s no better time to start than right now. Vanguard and Fidelity are the popular places to buy cheap index funds, but be on the lookout for some special offers that you can take advantage of. Brokers are at war with each other in customer acquisition.