Be your own expert and avoid the Wall Street noise
Have you ever turned on CNBC and watched the round table segment where approximately 8 analysts are debating about recent market activity? One of the main purposes of the segments ‘Power Lunch’ and ‘Closing Bell’ is to fill time. With microphones in their ears, the analysts are encouraged to argue opposing perspectives while a support team electronically feeds them the information they need. Similar to most mainstream news channels, CNBC always wants higher ratings and they do this by covering the ‘hottest’ investments and interviewing the smartest investors. All of the yelling and screaming to “buy this!” and “sell that!” is like a smokescreen, distracting viewers from actually learning how to invest. Whether you’re reading the Wall Street Journal, watching CNBC, or browsing the mutual fund database Morningstar, you’re going to be coming across brokers shoving their money-making abilities down your throats. In a digital age of information overload, shiny lights, and dopamine hits, we crave truth, honesty, and intellect. We crave to take control of our own lives.
So how do you choose the best investments for your automated portfolio? Today there are more than 10,000 mutual funds and 1,400 ETFs. There is $13 trillion in actively managed mutual funds with 265 million account holders around the world. Talk about an information overload! The average person doesn’t have the time and the emotional perseverance to endure such a challenge.
We can reduce your decision fatigue by offering one rule. DON’T invest in actively managed mutual funds.
An actively managed fund is a management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index. An incredible 96% of actively managed mutual funds fail to beat the market over any sustained period of time. As for the 4% that do beat the market, there is no guarantee that these funds will beat the market the next time around. 4 percent! Give a 3-year old a crayon and a paper with a list of investments and she could probably have a higher chance of selecting better investments than the actively managed funds.
What’s absurd is that the 96% doesn’t even take into account survivorship bias. According to Investopedia, Survivorship Bias occurs because many funds in the investment market are closed by the investment manager for various reasons leaving existing funds at the forefront of the investing universe. Because of this, aggregate mutual fund performances generally are overstated because the worst funds to make it into the conversation.
Oh, and I’m not even going to go into the exorbitant fees charged by most of these actively managed funds. And they fucking eat into your returns!
Studies have repeatedly proved that the best way to allocate your assets in accordance with your risk tolerance and your objectives is by diversifying through low-cost index funds. Invest in great American businesses without paying all the fees of a mutual fund manager and hang on to those companies, and you will win over the long term. While the allocation of index funds is different for everyone, the most renowned investors — Warren Buffett, Jack Bogle, Paul Tudor Jones, Bill Gross — they all agree that the average investor should predominately go into low fee index funds as they have the most reliable outcomes.
Vanguard’s stock index funds. Vanguard’s Total Bond Market Index Fund. Vanguard and Dimensional Funds are both great low fee index funds
It’s so easy to get caught up in the energy of Wall-Street and make irrational decisions. Think like an insider. Don’t tolerate the “herd” mentality in your life. Stay the course and stick to the plan. By taking charge of your finances, it will provide you with the confidence and resources you need to master other aspects of life.