Sorry…You Can’t Beat the Index. Here’s Why:
Are you one of those investors who thinks you can beat (or even match) the performance of an index over an extended period of time?
In reality, you can’t…ever.
During our investment meeting last week, an article was shared (“The Big Lie of Market Indexes” by Lance Roberts of Advisor Perspectives) that addressed why individual investors will never beat the market indexes.
Common financial myths continue to be promoted to investors, which often lead to unrealistic expectations of investment returns (for example, the stock market averages an 8% annual return). While the S&P 500 index has produced an annualized return close to that number, the vast majority of investors fall well short of this benchmark.
Why is this the case?
Here are a few things to consider:
- The index contains no cash.
- The index has no life expectancy requirements—but you do.
- The index does not have to compensate for distributions to meet living requirements—but you do.
- The index requires you to take on excess risk (potential for loss) in order to obtain equivalent performance—this is fine on the way up, but not on the way down.
- The index has no taxes, costs or other expenses associated with it—but you do.
- The index has the ability to substitute at no penalty—but you don’t.
- The index benefits from share buybacks—but you don’t.
As a result of misguided expectations, many pre-retirees have become overly reliant on strong investment performance to meet their retirement savings goals. This dependence has contributed to findings that show a majority of Americans are woefully behind in their savings goals for retirement.
According to a recent cnbc.com article (June 19, 2017), “Americans’ number one financial regret involves not saving enough—a whopping 46 percent of adults surveyed by Bankrate about their biggest money mistakes wish they had put more away, whether for retirement, emergency expenses or their children’s educations.
It’s important to remember that investing is not a competition and, as history shows, there are disastrous consequences for treating it as such. So, do yourself a favor and forget about what the benchmark index does from day to day. Instead, match the strategies in your portfolio to your own specific goals and objectives.