I have great news for you -- you can’t beat the stock market!

The best kept secret in the world of finance is that you can’t beat the stock market.

But before we go there, let’s cover a few basics. A stock is a piece of a company that you can buy and then own. You literally own the company. If the company does well, say makes a lot more money than when you bought it, then more people want to own it. If more people want to own a share of stock, that bids up the price. That’s how your money goes up. If the company does worse than expected, people sell the stock, so you look for a buyer and realize they want to buy it at a much lower price than what you paid.

Also, some companies will pay you cash from their profits every year because the company doesn’t need to hold onto the cash. These are called dividends. Finally, the stock market is where all these shares of stock change hands via exchanges. But when people follow what the stock market is doing, they are following these large measuring instruments call Indexes, like the Dow, the S&P 500 or the NASDAQ. What those indexes do is they combine the value of stocks of a similar kind, like the Dow that covers the 30 largest stocks or the S&P 500 that covers the 500 largest stocks. So, when we say the stock market is up or down, each of those indexes is telling us how the stocks they measure are doing.

The notion of beating the market is to say, “If the S&P 500 goes up 5% this year in price, I hope the stocks that I own will go up more than that.” The way to do that is to only buy the stocks that will go up. Seems reasonable.

But how do you pick the stocks that only go up? Well, you might start by doing what Wall Street does. They hire professionals who do this every day. These professionals typically have Ivy League backgrounds and make LOTS of money picking only the stocks that will go up (they can also pick stocks that go down, but let’s keep this simple for now). Importantly, they buy the stocks before they go up.

Wall Street companies allow you, the average investor, to buy into things called mutual funds run by these people picking only the stocks that go up. That way you can go about your day as a lawyer, a painter, a mom or a business owner, knowing confidently that your money is beating the market.

There are thousands of these funds out there, and they all have flavors, like “mid cap value long only fund” or “small cap growth.” The jargon is super complicated to make sure you understand even more clearly that it is so complicated you cannot possibly understand. In fact, they are so complicated that we all often get overwhelmed at the whole investing thing and just let the experts handle it. We walk into the local advisor’s office, maybe they’re a family member or go to our church. They are kind and sit down with use for an hour, making sure that we hear all the same jargon about the mutual funds, the secret language of inner genius. You instantly trust them to know what they are doing.

So, let’s say that in April 2011 you handed over the money you saved up to that point, $250,000, money that you accumulated in your last job that the advisor convinced you to roll over to allow him to manage. What he may not realize is that the money you gave him was hard to save. It’s money that could have been used for a home remodel you’ve been patiently waiting for, the European vacation you have always wanted to go on, or to replace your 10-year-old car.

But that money is for your future self. You know what you will look like in 20 years or so, maybe graying but with deeper laugh lines, a constant smile and a desire to spend the second half of life traveling and volunteering.

After this meeting, you get a statement every quarter. You look over the dizzying array of 30 mutual funds that your $250,000 is divided among and breathe a sigh of relief. Someone smart must have done this. Thank goodness you found him.

Each quarter you notice that your money has gone up. Yessss! Bam! I picked the guy who can beat the market! Look at those returns. You met with him that first year April 2012, and it was a giant love fest. He showed you that your money grew 4% to $260,000! You beamed with pride at his work. Gosh, in a savings account you couldn’t have even gotten 1%!

The next year it grew 13%. What!?!

In April of 2014, it was up 18.7% . You’re naming your first child after this guy.

The next year 12% up! He is a baller!

2016 oops…we were down a couple points. Bummer. Still a good guy. The meeting was a little sadder, but he reminded you of all those good years!

2017 up 13.7%. Back. In. Business.

2018 up 12.3%. You could get used to this.

But then you started reading articles and hearing strange quotes from Warren Buffet, some guy named John Bogle and people on your floor at the office talking about passive investing. They don’t have your investment guy, it appears, and they claim that the odds are stacked against beating the market. Well, that’s odd because you have been winning for 7 years.

Finally, you ask the question. I know you say you can’t beat the market, but I have been doing it 6 out of 7 years. In fact, I started with 250,000, and now I have $496,432!

Your friend mentions something that hadn’t occurred to you. The whole market had been going up that time. She encourages you to do a simulation to test to see whether you beat the market. Take $250,000 and put it in a calculator to get what your money would be if it had simply been in a passive mutual fund, a fund that just tracks the market and doesn’t try to beat it. In this case it was the S&P 500, and you find out that, had you done that, you would now actually have $573,387. You would have $77,255 more than you got! Imagine what you could do with that much money?

So, you do a lot of reading, and you find out that your advisor was taking 1.25% from your account every year in fees, and that the funds he put you in were reaching into your money and taking out 1.05%. They took $77,255 from YOUR money to fund their own vacations, car purchases or home remodels. And they took it from the future you. The you that you care about so much.

Then you learned something totally nuts. As scary and as daunting as the industry was, you could have called those big names you see everywhere, like Fidelity, Vanguard, or Schwab, and they could have gotten you into those funds you like for minimal fees. Instead of the 2.3%, they could have gotten you into funds that cost .09%. It would have left more money for the future you.

Ladies, what is happening in this industry is terribly exciting. The numbers used in this piece were from a recent research project in Utah where an advisor got the results of investment managers in the state, and what the average fees for investing were. They came to 2.3%. Research also shows that it is nearly impossible to beat the market. In fact, 90% of these mutual funds I mentioned in this blog underperformed the market over long periods of time (in this case 20 years). That means you add an advisor fee on top of an underperforming mutual fund made worse by fees, and your money is nearly guaranteed to underperform the market.

This is so liberating! You now don’t have to outperform the market! You get to live a life that is simple and easy to understand. You get to put your money into a fund that is boring, that just buys the whole stock market, but you get to sleep at night knowing, without a doubt, that it’s your money’s best shot at not underperforming.

While I would never guarantee that the future of the entire market will be that passive wins in every time period it would take a lot to turn the current statistics around. Back in the 60s one of the most common theories proposed was called the efficient markets hypothesis. Basically, the market was found to be too efficient to beat. Imagine how hard it would be to beat now, with the internet, regulations for transparency, and a lot more participants studying it.

If you are currently using an advisor and find this all interesting, I suggest you have someone do the math to see how much money you would have if you were in a passive strategy. It could cost a few hundred dollars to do the math, but if that could help you take the plunge it could be worth it. Feel free to email me for the name of a professor I could recommend whom you could pay to run the math independently.

And if you are looking at your 401(k) and a dizzying array of options, remember that simple wins every time. Take action today: face the investment music. Go to the advisor on your 401(k) plan and request a meeting. Tell them you want the simplest, lowest cost line-up they got. And if for some reason he (or maybe she) tries to talk you into rolling your money into a brokerage account they can manage, run for the hills! No, seriously, don’t do it, and report that activity to your employer. That’s no good.