chess piece

Greed is your worst enemy in making money. It’ll consume your time and waste your money. The belief that you can do better, that you can beat the market, or the professional you hire can beat the market, is plainly false considering all costs. Keep it simple and remove the hassle because you’ll be rewarded well just being in the market, and if you really want to do better, than innovate instead of playing games with something you can’t control.

The drive to beat the market is probably the most common reason I hear people say that they day trade or buy mutual funds that are managed by professionals. I admit that people can beat the market, and when you DON’T consider the costs of taxes and other expenses like transaction costs, there are plenty of people beating the market. The problem is that in order to beat the market, you incur heavy costs in doing so (especially if you’re trying to do this with your tax benefited accounts), and 90% of the people – professional and otherwise – will end up losing money and time when they could have done it a better simpler way.

The biggest problem for non-professionals is that they don’t know how to measure themselves. So, as long as they’re getting a return, they feel great. But compare that return to the return and much lower risk with owning say an index fund is like comparing the hole you dug in your backyard last week (because of all the money you think you’re about the make) to the Grand Canyon.

On the other side, the biggest problem with professionals is that they hide the facts and tug at your greed cord. They say that if Peter Lynch and Warren Buffet can do it, so can others, which is like saying if Einstein could do it, then anyone can. They’ll show you numbers, but leave out all costs, which they know show they’re losing money that you’d make using passively managed funds like index funds.

They’ll point you to this year’s winners, and show you that index funds aren’t “winning”, and they didn’t top the list of biggest “winners” last year either. They’ll tell you that you can do better, “You can beat the market, trust me!” It’s true that each year index funds will not be the biggest winner, but this year’s winner is next year’s loser, and the chances only get worse the longer term you look, when in contrast to index funds, it only gets better the longer term you look especially when you include all costs (time and money). So, if you go the professional route, you’re down to picking the winners each year, which is like picking the winning lottery numbers each year, and you also incur extra costs from switching between winning and losing funds losing you more money and time. Keep it simple, don’t do it.

If you really want to do better than the market. If you really want to expand, then become an entrepreneur. If you can’t make more money doing what you already know, or improving something that you have a personal passion in, then how can you justify doing that in the financial markets where you’re probably less knowledgeable? Innovation is the best way to make money because where you create value you will inherently derive financial benefit. Being in the financial markets is a great way of growing your wealth, but keeping it simple will save time and money.

Do Individual Day Traders Make Money? [HTML]

Is Your Alpha Big Enough? [PDF]
How Well Have Taxable Investors Been Served in the 1980s and 1990s? [PDF] (expands and improves on the finding in Is Your Alpha Big Enough?)

Asset Class on Wiki [HTML]