It’s no wonder that people find the topic of investing to be confusing. Everyday we receive conflicting messages about how to be a successful investor.
The mutual fund industry and the stock-tip-newsletter industry tell us that:
- Picking stocks successfully is difficult for the average investor, but
- A professional has a good chance of picking stocks that will outperform.
- A mutual fund (or stock newsletter) that has outperformed the market in the past is likely to outperform the market in the future.
The discount brokerage firms tell us that:
- Picking stocks on your own is easy!
- Rapid buying and selling of stocks (or other investments) is the best route to profits.
- With up-to-the-minute information, you can time the market successfully.
The mainstream financial media tells us that:
- Knowing what happened in the market yesterday (or last month) is essential for your success as an investor. If you watch the news enough, and listen to enough economists/market analysts, you have a good chance of predicting the next market move.
- You can improve your performance by picking hot funds (particularly, those mentioned by a magazine).
The academics tell us that:
- Investing in low-cost index funds is your best bet for every single asset class.
- For mutual funds, expenses are the only meaningful predictor of future performance.
- Any investor–even a full-time professional–is unlikely to be able to reliably outperform the market.
- Reliably predicting short-term market moves is impossible. Better to buy & hold for decades at a time.
Who do you believe?
Given that three of the four parties involved are trying to sell us something while they give us advice, I’m personally inclined to believe the fourth. (It probably doesn’t hurt that the academics appear to be the ones with the best evidence to backup their claims.)
What about you? Who do you believe?