We have all heard the expression “the house always wins”. Most folks who gamble at casinos are speculators, and sooner or later they find out this expression is all too true. This idea also holds true for those who speculate and try to beat the market.
The difference with the market is that folks have the opportunity to “invest” by “betting on the house” instead of “speculating” and attempting to “beat the house”.
Each year a research group called DALBAR performs a study on investor behavior. The study compares the investment results of the average stock fund investor to the S&P 500 Index, which is a broad measure of the U.S. stock market. The most recent study in 2014 revealed that over the past 30 years, ending in 2013, the S&P 500 Index returned on average 11.1% per year. In dollar terms, that means $100,000 would have grown to over $2.4M. However, the research also shows that over that same 30 year period the average stock fund investor earned only 3.7% annually, which means their $100,000 grew to only $227,000, less than one tenth of that of the S&P 500. In this example “the house” is the S&P500 index.
So, why the big difference in performance?
Many investors tend to make bad market timing decisions in an attempt to “beat the market”. However, investors aren’t entirely to blame. The financial media, including business TV, newspapers, and magazines, has conditioned investors to believe that “If you want to be a successful investor, you have to know when to be in and out of the market”. The media would have you believe, in order to be successful, you need to stay tuned in so you keep on top of the economy, company earnings, and the headline news. Unfortunately, all these things have something in common. They’re all things we can’t control. Investors who allow this “daily-noise” to dictate how they invest are “speculating”, NOT investing.
So what’s the solution?
Focus on what you CAN control, rather than attempting to focus on what you CAN’T control.
You can’t control the economy, you can’t control company earnings, and you certainly can’t control the news. However, you are able to control TWO things. Two things that will improve your investment experience. First, you can control how much risk you take and how you diversify that risk. Second, you have control over the investment fees you pay. Controlling these two variables is what’s called “investing”. Whereas, attempting to time the market based on short-term day-to-day noise is called “speculating”.
So the choice is yours…
You can be a speculator and try to beat the market even though the odds are against you. Or, you can choose to be an investor and let the market work for you!
