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Why beginner investors are lucky

“Investing is a funny business. It's really easy to be average. Just buy an index fund. It's really hard to be above average.”- Howard Marks

What do Warren Buffett, John Bogle, Charlie Munger, Howard Marks, Jack Dorsey, and Ray Dalio have in common? They are all prominent investment figures who have advocated for the merits of index funds for non-professional investors. They all emphasise their cost-effectiveness, simplicity, and potential for solid returns.

Welcome to today's blog [#86], which will be the second of the investment decisions series. Investing is important to ensure our savings earn a return. Having a simple investing strategy that we can follow without hesitation is something which over a long period of time will pay dividends (pun intended!). THIS IS NOT INVESTMENT ADVICE

What is an index fund?

Imagine the amount of time you spent as a child deciding which sweets to put into your Pic'n'Mix. More cola bottles, red lips or jelly babies? Imagine this now. What if I told you that picking one sweet from each jar ends up with a fine result each time?

An index fund is taking a bit of everything that is available rather than making a choice. Stock indices (e.g. FTSE 100, S&P 500) are baskets of companies. In the baskets they have companies in different weights. A very big company, it will likely have a larger weighting in the index than a smaller company. To get the same returns as the index you buy the individual companies in the same weight as the index. This is what an index fund does for you, so rather than buying 100 shares you only need to buy 1.

An investor is in general faced with a lot of choices, four of which are:

1) Not investing at all

2) Putting together a set of stock picks themselves

3) Buying an index fund

4) Buying a professionally managed fund that aims to return more than the index

The lazy amongst us might feel that 2) & 4) sounds too much like hard work, and 1) does not work unless we need the cash. So I hope I can count on lazy people to go for the index fund option.

2) and 4) are for those people who are willing to roll their sleeves up and get down and dirty with the investment decision-making either by finding companies that will beat the market, or by investing with managers they believe will beat the market. But that's not very easy.

Passive vs Active

Having been in the investment industry for a long time and heard professional investors giving their story, I could be fooled into believing that all these well dressed, articulate story-tellers are beating the market. BUT, the numbers tell a different story.

S&P are a data provider compare active stock funds versus their most relevant index. Habitually, more than three-quarters of active managers fail to beat their index over 10 years! This tells us two important things. Firstly, it tells us that over a long period of time, some of the smartest minds who spend their entire day on stock investing find it challenging to beat the market after their fees. Secondly, it raises the bar for us to try and beat the market too. If we are not going to be consistently spending time, effort and doing it with discipline, why would we manage our own stock portfolio?

The big take-away

The big take-away, and investing is fairly unique in this respect, is that a complete beginner can get average returns in a very low effort way.

An example simple strategy

Let's say you have convinced yourself that the index approach is for you for your retirement in 40years, you then need to make a couple of decisions.

  1. Which index do you want to buy (and which provider)

  2. How do you decide when to buy

A simple strategy (and again THIS IS NOT INVESTMENT ADVICE) would be to choose a global stock index through a low cost provider (e.g. Vanguard, Blackrock), and put the same value away each month, every month. This strategy is simple, does not require you to make decisions but gets your money into the market.

So why would you ever manage your own stocks?

I think of managing investments much like cooking. It takes a lot of practice to be better than the alternatives but is challenging and enjoyable when you take it seriously. If you want to manage your own money for the sport of it, I would suggest putting a large majority of your money in an index fund and then actively investing the rest.

Investing money, if that's your thing, is a hugely enjoyable thing. You get to dig deep into things and are faced with really tricky decisions. Some people take views on a country, others a sector or even individual company. I think the important distinction is you do not confuse your interest with your expertise. Like anything start small and only then grow.

So what?

  1. Follow the advice of many of the investing greats and buy an index fund to achieve average market returns. Investing is one of the only places than beginners can get average returns.

  2. It's hard to beat the market and set and forget investment strategies can be simple and easy to implement.

  3. Don't let me put you off getting involved in investing though. I have enjoyed it for 20+ years but have definitely been overconfident and made all the mistakes. It is an enjoyable and challenging hobby for those who are willing to do the required work.

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