Individual Investors ... Double Your Money the Easy Way ... Otherwise Pogo Rules Apply (We Have Met the Enemy and He Is Us)

Investing in stocks isn't as hard as we make it.


Investing in stocks is more profitable for us when we make it easy on ourselves.


As a general rule, the paid "experts" make money off the risk taking and money providing amateur individual investors. We're the amateurs.


But it need not work that way.


All we have to do is stop feeding the "experts" and keep the money for ourselves.


And one more thing. Invest for the long haul and avoid unnecessary fees and expenses along the way to a successful and profitable amateur performance.


The Best Investment Strategy? Getting Out of Our Own Way tells it like it is, or in the case of most individuals, at least could be, because as the wise old sage comic strip character Pogo says, we have met the enemy and he is us:


"We’re still making the same old mistake of buying investments when prices are high and selling them once their prices have fallen. . . . the behavior gap still exists. The behavior gap is what I refer to as the difference between what the average investment returned and what the average investor earned.

What’s the difference? Pretend for a minute that we have a mutual fund with a 10-year-average return of 10 percent per year. That’s the investment return. If you put your money in the fund, kept it there for the entire 10 years, and didn’t add or take out any money, then your investor return would also be 10 percent. So in this very hypothetical example, the investment return and the investor return were the same.

The problem is that few people invest this way. Who would buy a long-term investment and actually hold on to it for the long term? That would be silly!

Most people buy and sell. . . . Today, we hold our stock investments for about six months. We’re clearly not what anyone would think of as long-term investors.

It’s easy to understand why we behave this way. We’re hard-wired to get more of those things that give us pleasure or security, and to run away from things that cause us pain. That trait has kept us alive over thousands of years, but it makes us terrible investors. When we follow our natural instincts, we end up buying things after they’ve gone up. Then, when they go down, which they always do at some point, we sell. . . .

But this well-intentioned behavior has a cost. . . . the average equity mutual fund in the United States had a 10-year average return at the end of 2013 of 8.18 percent. The average investor only earned 6.52 percent. That’s a difference of 1.66 percentage points. It may seem like a small number, but it makes a big difference when you think of it in terms of dollars.

Imagine 10 years ago that you put $100,000 in an average American equity mutual fund. If you just sat there, you’d have $219,517 in your account at the end of 10 years. But because we’re human, you more likely only earned the 6.52 percent return of $188,066. That equals losing more than $30,000, a 17 percent difference.

The numbers are even more depressing in other investment types. Balanced mutual funds are designed to help us manage our behavior by including both stocks and bonds. They provide a cushion in down markets in exchange for not hitting it out of the park on the way up. It seems like that would help us behave. Well, the average balanced fund returned 6.93 percent, but the average investor only managed 4.81 percent.

It’s critical to understand that none of this is the investment’s fault. The average investment did its thing, but our behavior determines what we actually get. What makes this so frustrating is that we’re talking about an average American equity fund, not the best one, just the average. In other words, all we had to do to improve our return by over 1.5 percentage points was pick a mediocre (by definition, average) equity fund and then just sit there. . . .


The past is the past, and there’s nothing we can do about it now. But here’s the key: The next 10 years start today. If the past is any indication of the future, we need to do something different if we want a different result. The hard part of investing isn’t picking the best investment. Instead, it’s sticking with the one we’ve picked. Only then will we have a shot at closing the behavior gap over the next 10 years.

The best part about this is that once you design a portfolio, the only thing you have to do is nothing, aside from some occasional rebalancing when some investments rise and others fall. It reminds me of my favorite Warren Buffett quote: “Benign neglect, bordering on sloth, remains the hallmark of our investment process.” As he’s demonstrated more than once, investing is one place where we are rewarded for being lazy."

Summing Up

Don't pay "experts" to try to beat the market. For individual investors, it's a loser's game.

All that happens is that the experts take your money and reduce what the amateur would have earned.

S&P 500 low cost passive index funds work best for the vast majority of amateur individual investors.

That's all the expertise required, because money not spent on experts is money made by us amateurs.

And money made compounds into lots more money made over time. In fact, an extra 2% annual return (see above examples of individuals who actively trade and try to beat the market) will become twice as much money in 36 years than it would have been had it been invested by the traditional "experts."


That's the 'doubling' rule of 72 at work (2% rate of additional annual return multiplied by 36 (number of years invested) = 72.

And that's my amateurish take.

Thanks. Bob.