Burton G. Malkiel & Charles D. Ellis
“Plan your play and play your plan.”
The idea behind this quote is to keep your financial plan simple, and then stick to it. Literally play out your plan. The investment strategy of indexing can be very helpful in that, because it is relatively simple to follow, and it has outperformed all but a handful of the thousands of equity and bond funds sold to the public.
Index funds buy and hold the stocks (or bonds) in all or part of the market. By buying a share in a “total market” index fund, you own a share in all the most influential businesses in the economy. Think of this as owning the whole pizza pie. As a result, there is increased peace of mind and reduced anxiety and expense of trying to choose which individual stocks, bonds, or mutual funds will beat the market..
The market is more intelligent and better informed than most investors. You can imagine how that’s not easy for investors to deal with and accept. Most financial advisors earn attractive fees based on the claim that they can pick the best stocks and outperform the market. The harsh truth is that almost no investor consistently outperforms the market by predicting its trends or selecting individual stocks. Over ten-year periods, stock market index funds have regularly outperformed two-thirds or more of the actively managed mutual funds. Don’t believe me? See the SPIVA data in the resources.
Why does this happen? Here is why. Money managers, as a group, actually can earn no more than the market return before expenses. The average actively managed mutual fund charges about one percentage point of assets for each year for managing the portfolio. It’s the expenses that drag their return well below that of the market as a whole. On the other hand, low-cost index funds charge one-tenth as much for portfolio management. Also, individual investors – given that they too are just humans – may suffer from a well-known bias called “Overconfidence Bias”. They may overestimate their own abilities, leading to activism that often works against them.
Given my interest in investing, I searched the internet for competitions that might stimulate my curiosity and satisfy my urge to “plan the play, and play the plan”. To no avail, most competitions out there want me to pick stocks and engage in the kind of short-term buying, selling, and forecasting that I know does not pay off. I prefer to have ownership of the whole pizza pie and hold onto it.
As Jason Zweig, a financial columnist for the Wall Street Journal, says: “If you can plug your ears to every attempt (by anyone) to predict what the markets will do, you will outperform nearly every other investor alive over the long run.” Only the mantra of “‘I don’t know, and I don’t care’ will get you there.”
Don’t chase hot performance because it is costly and self-defeating. Warren Buffet is well known for purchasing undervalued stocks and holding onto them. He has also said that most people would be better off investing in index funds (even when he has taken an active role in managing some of the companies that he has invested in). Buffet indicates that “the correct holding period for a stock is forever.” Isn’t that a relief coach? Plan your play and play your plan.
Links for Further Reading:
SPIVA data on active management performance over time https://www.spglobal.com/spdji/en/research-insights/spiva/about-spiva/
Overconfidence bias: https://www.schwabassetmanagement.com/content/overconfidence-bias
