Investing in the stock market is tricky and you continously hear about how X person beats the market. This is my first ‘educational’ post where I will post what I think about investing in the stock market. I focus on normal people who doesn’t have time, energy or the interest for the stock market.
When people hear the words “investing in the stock market”, they often think of two things in my experience. That you can either gain a lot of money or lose a shit ton of money. Both of these ‘reasoning’ is true.
Personally, I only invest in index funds. An index fund is a type of mutual fund where they copy X index. The fund is basically aiming to follow to market. It will never ‘beat’ the market but rather ‘go with the flow’. The underlying reason for that is because, I do not have time either to figure out ‘which stock’ that will beat the market. It also have very low fees (Broker and transactions fees). Those two things sounds ‘ok’ so far. But what if I told you that index funds (Passive investing) beats actively managed funds (Active investing)?
That is reason nr. 1 why I only invest in index fund. Very few people beat the market continously over time (I think Warren Buffett is the only one). Below you see a picture of active vs passive investing performance from 1980 – 2015. As we see quite clear, passive investing is perform much better.
The reasons behind this isn’t quite clear and people will argue differently why passive investing is performing (Way) better than active investing. My take on it however consist of two reasons. One, it is much lower fees. That means for you as an investor you will keep more of your returns. Two, it is hard to beat the market – it should be rather clear. It is around 2 800 companies listed only on New York Stock Exchange. How can you say that the company you picked will beat the rest? Yes, from time to time you will eventually win; but as seen here – in the long run you will underperform the market.
That was today’s lecture. I hope it made you smarter for guiding thru’ the jungle of investing. Cheers!