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“I guarantee to make you an investment genius in six months. Send me $199, and I will reveal my secret.”
Of course, I am not serious. Please don’t send me money. Please don’t send any, either, to other self-proclaimed “experts” who are serious about scamming you with “secret investment advice.”
Here is my tongue-in-cheek example of how to become an investment guru: Randomly choose 64 people. Tell 32 of them the price of a share of Tesla will be higher at the end of the month; tell the other 32 it will be lower. Your “prediction” will be true for one group or the other. At the end of the month, divide the “true” group into two groups of 16 and repeat the exercise. At the end of the second month, divide the “true” group in half and repeat. Continue the pattern with the remaining eight, then four, and the last two. After six months you will have correctly predicted the movement of Tesla stock to one person—who will think you are a financial genius. Now you can market your secret to others.
Steve Forbes, editor of the well-respected financial publication Forbes Magazine, once said, “You make more selling advice than following it. It’s one of the things we count on in the magazine business, along with the short memory of our readers.”
Read that again. Remember it the next time you read about another “expert’s” investing secrets.
Be skeptical, too, of the swarms of active money managers who claim they can “beat the market” and give you above average returns. Usually, “the market” they refer to is the Standard & Poor’s 500 Index.
If you invest in the S&P 500 Index, you own a fraction of each of the largest 500 companies in the US. It is one of the best ways to do “passive” investing, where you accept average market returns over the long term through a mutual fund that owns a static mix of stocks, bonds, or real estate. “Active” investing involves more buying and selling in an attempt to beat the market—which few active investors consistently manage to do.
The Mid-Year SPIVA report by S&P Dow Jones Indices first began publication in 2002 and has tracked what percentage of actively managed funds have outperformed the S&P since that time period. As time goes on, the number increasingly drops. According to the 2023 report, based on a risk-adjusted return, only about 6% of actively managed funds have outperformed the S&P 500 over the past 10 years. For periods over 15 years, only 3% beat the index, and over 20 years, just 2.5% of actively managed funds beat the S&P 500 Index. This means that over 15 or 20 years, 97% of active money managers didn’t do as well as non-experts who passively invested in the S&P 500 Index.
In addition, active investors generally pay around 0.7% a year in fees, compared to around 0.2% year for passive investors. According to the SPIVA report, the average active investor earns 3% less annually over 10 years than the average passive investor. That’s a big deal.
Why, then, does active investing still flourish? I would suggest three reasons.
First, people are confused—and many large investment firms and financial publications have a financial incentive to maintain that confusion. Headlines like “Leave Your Portfolio Alone” don’t sell magazines.
Second, people tend to be overconfident and impressed by “experts,” mistaking luck on the part of a money manager for outperformance.
Third, that lucky few do sometimes beat the market. Some will gladly sell you their “secret.” Here it is, for free: Their moneymaking secret is selling bogus advice to you.