Lazy, Boring Investors Tend To Get the Most Exciting Results

Like all the children of Lake Wobegon, every active investor I have met is above average. It’s a truly stunning victory, given that “the market” is just a collective average of the investors in it. And as every kid in my son Max’s kindergarten class cannot be above average, it is a statistical impossibility for all of us to be above average investors.

Somewhere along the way in the history of investing, we were taught that investing is supposed to be dopamine inducing “exciting.” Our job isn’t to just grow our money. It’s to grow it faster than our neighbor. We are lured into the world with yelling, bell ringing, smiling, minute by minute cable news, and we dare not be on the sidelines. Ticker stock symbols scroll across our computer screens, as if all those opportunities to “win” will end by the time they roll off our screen. So, we better act. Now.

While investing long-term in stocks and bonds makes sense, trading them to try to “win” is a loser’s game, as Warren Buffett has repeatedly warned.

Last year, I met with a woman who wasn’t convinced she should join her retirement plan. Sure, it offered a great tax benefit, stretched her savings and got her free money from the company match, but she told me her investment advisor could take her savings and grow them much faster than the investments offered in the retirement plan.

Her money had grown a lot, but her personal rate of return from her all stock portfolio, relative to the S&P 500, a stock index and a pretty good “average” of the market return, was lower than the S&P over the past decade. Yes, her money had increased but not as much as the market had increased. She would have been better off with average performance in boring, passive investments in a retirement plan.

While it may seem paradoxical, if you want the very best investments available to you, look no further than the standard menu in your retirement plan. If you have a target date retirement fund made up of passive index fund investments that buy everything you need (stocks and bonds), produce an average performance, at a low fee, then you by definition are performing “above average.” How? Well, you are doing better than most people trying to beat the market. According to the SPIVA index 2020 mid-year scorecard, 87.23% of actively managed mutual funds failed to beat the S&P 500 over a 15-year period. You would think that the number would be 50%, so how could it mathematically be so high? The fees charged on those funds tend to be pretty high.

The best way to reap average performance is to do as little as possible with low fees. In other words, the lazier you are as an investor, the math tells us, the better you will do.

If you don’t believe me take Harvard University (or Haaaahvahd) the ultimate institution one might think would reap the rewards of higher gains from all that extra effort and brain power. Yet after years of lagging the market, the results are in for the fiscal year end 2020 of the famed Harvard endowment. It underperformed a basic 60% stock and 40% bond portfolio. Again.

One of my favorite headlines of all time was on October 19, 2016 in the Wall Street Journal. “What Does Nevada’s $35 Billion Fund Manager Do All Day? Nothing.” It was a story about Steve Edmunson, a guy who single-handedly manages the Nevada Public Employees’ Retirement System, whose performance beat other pension funds for years, including the largest, CALPERS. His secret? The 44-year old money manager, who brings his lunch to work each day so he doesn’t have to spend $10 eating out, buys index funds and keeps costs as low as possible.

Four years later, his motto, “Do as little as possible, usually nothing,” still rings true.

If you want to be a high achiever in personal finance, find a job you love, spend less than you make, stay out of credit card debt and make sure you are saving 10% for retirement, or enough to catch up if you started saving late. That’s probably enough work to tide you over for a few decades. In the meantime, if you want to be the best investor out there, strive for lazy, average and boring. It’s a winning combination.

SPIVA US Scorecard: https://www.spglobal.com/spdji/en/spiva/article/spiva-us

Harvard performance: https://www.markovprocesses.com/blog/measuring-the-ivy-2020-first-take/