Here’s the bottom line about investing, straight from Fortune Magazine’s 10 Rules for Building Wealth: “Even the best fund managers have trouble beating the S&P 500, so give up the chase.”
If the professionals — people who spend hours each day studying the markets — can’t do it consistently, why do you think you can? Sure, there are success stories, but they are anecdotes, not true representations of what trading in the stock market is really like. Survivorship bias also shows that we’ll hear about success stories much more often than we’ll hear about failures, leading towards more misunderstanding of the way markets work.
Matching the market does not mean you’ll receive average returns. Considering most fund managers don’t beat indexed mutual funds, matching the market will exceed the average.
Fortune says, “The most straightforward way to avoid this trap is to diversify your assets and then rebalance your portfolio at least once a year.”
I’ve written about diversification and rebalancing quite a bit in the past. Here are some professional individuals who have done so as well:
* Article: Stress-Free Investing in Four Easy Steps, by Erin Burt
* Book: The Boglehead’s Guide to Investing, by Larimore, Lindauer, and LeBoeuf (my review)
* Book: The Smartest Investment Book You’ll Ever Read, by Daniel R. Solin (my review)
Published or updated December 14, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.