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Are You A Genius Investor? Concentrate on Your Career
As noted before, most of us aren't the Babe Ruth of investing. Therefore, we should just buy broad-based index funds (or ETFs) and move on with life.
But there is another, subtle reason why index funds are the way to go for most people.
Career Opportunity Costs
When you spend a ton of time researching and investing in individual stocks or bonds, you are losing time you could have spent developing your career or a side business. Is the time you spend researching stocks best spent that way? That will only be so if you can consistently outperform index funds. A tall order even for professional investors.
If you are just matching (or doing worse than) the indexes, you would be better off spending less time on research--and instead focusing on your career and developing skills to enhance your earning potential. Yes, investing is super important, but successfully evaluating, purchasing, and then selling individual securities at the right time is an insanely rare skill.
Focus On Your Career, and Let Index Funds Work Their Magic Over Time
If you can't outperform the markets (extremely difficult) or if you have little capital to invest, your time is most productively spent developing your career skills and strengthening your earning capacity. These skills can be as an employee at an elite institution or as an entrepreneur.
Great insight. How would you rate some of the newer lower cost money management firms like Betterment or Wealthfront? Is there any truth to their claims that you have have your cake – higher returns than the market – and eat it too – spend zero time thinking about investing.
Thanks for your comment. I think Betterment is awesome. Particularly if you are putting funds into a taxable account, Betterment’s tax-efficient algorithms are super handy and probably more than make up for the fees you pay Betterment (because of the savings through tax loss harvesting).
Here’s a pretty good article from Mr. Money Mustache with nuances about recent fee changes. http://www.mrmoneymustache.com/2017/02/01/betterment-cranks-up-features-and-costs-is-it-still-worthwhile/
Betterment syncs up well with the point of this blog post. Don’t try to be a genius, get a systematic approach, and automate as much as possible. You will probably outperform 90 percent of investors.
However, I do believe many many many people would still benefit from meeting with a fee-only financial planner. There is a lot more to money than just investing. Thinking through saving for college, how to save maximally, when to start drawing social security, etc. Also, I worry that without someone (an actual person) serving as a buffer, many investors will panic in the next downturn and dump their holdings–even those held at Betterment.