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Rule for Building Wealth: Don’t Try to Beat the Market

This article was written by in Investing. 2 comments.


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)

Updated June 17, 2014 and originally published 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.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 2 comments… read them below or add one }

avatar TMT

I agree this is best approach to take.

Further, there is a big difference between “investment” returns and “investor” returns. And as a result, many investors have a hard time leaving their investments alone to work for them over time. They keep getting sucked into the buy high & sell low cycle driven primarily by fear & greed.

Check this out: http://www.qaib.com/showresource.aspx?URI=actnowfree&Type=FreeLook

I would attribute this to behavioral issues more than anything else.

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avatar Matt

I like the approach, trying to beat the market means you need to have a lot of good information at your disposal. My approach is to have some diversified investments while still leaving a little bit for me to invest in as I saw fit: for whims, companies that caught my eye and I think they’ll do good and simply for the risky investments that can’t guarentee anything.

As long as you ensure that the majority of your investments are tied up in funds or bonds that have consistently had good returns then any money you ‘play’ with is gravy if you get anything from it.

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