April and May are the most popular months to attempt one of the most demanding feats of all: climbing Mount Everest.
As I write these lines, around 1000 mountaineers are trying to climb the record-breaking 8849 meter mountain in Nepal.
Despite its popularity, climbing the tallest mountain in the world remains a challenging experience. Historically, only 50% of trained and motivated climbers who have put everything in place to climb the mountain succeed in reaching its summit.
For investors, the equivalent of climbing Everest could be successfully picking stocks that beat stock market returns.
Many try it. Few return unscathed.
In fact, the odds of success on Everest are gigantic when compared to the odds of outperforming stock indices.
The S&P Global organization has published the annual report since 2002 S&P Indices Versus Active Funds (SPIVA). This report measures the performance of professionals (mutual fund managers) against their benchmarks, i.e. the performance of stocks in the Canadian, US, emerging market, etc.
The long-term results are striking. After 5 years, 84% of fund managers underperformed their benchmark. After 10 years, 90% have underperformed, and after 20 years, more than 95% have underperformed.
“In other words, investors saving for retirement have less than a 5% chance of simply matching the return of a passive benchmark, even if they invest in a fund actively managed by a professional manager,” Sinan wrote recently. Terzioglu, financial adviser at Turner Investments (Raymond James) in Toronto.
If the numbers are so clear, why do investors continue this practice?
Around me, I notice that people who are captivated by the idea of beating the market often feel like they have no choice.
“I started saving and investing quite late in life,” an acquaintance told me recently. Compared to people my age, I’m not where I want to be. So my goal is to make up for lost time. »
I take no pleasure in writing it, but it’s essentially impossible to make up for lost time trying to beat the market. I know that’s not exciting advice, but if you’re not happy with the size of your investments, it’s best to decrease your expenses and increase your savings and investments – no matter how old you are.
Other investors simply want to take advantage of the companies of the moment. Cannabis company stocks were all the rage a few years ago. During the pandemic, stocks of companies like Zoom and Peloton seemed like obvious choices. More recently, Nio, Lion Electric and Lightspeed were approached to enrich their visionary shareholders.
Those who bought the shares of these companies understood the lesson: the stock market “owes” us nothing. The market takes our dollars and gives us humility in return; we pay him to deflate our ego.
Are companies beating the market? Yes of course. They are very easy to identify… afterwards.
On this subject, our brain is very good at romanticizing the story. Apple, the stock every investor would have liked to have in their portfolio, is only an obvious choice in hindsight. Apple lost nearly 60% of its value during the Great Recession of 2008, when virtually no one was sure the United States would survive the crisis.
During the same period, the action of the Canadian bank RBC lost 50% of its value in a slow erosion, day after day, for almost two years, while the unemployment rate approached 10% in Canada and the States United States, and that the appetite for investing was at an all-time low.
Today, we know how the film ends. But in the heat of the moment, there is no certainty. Few people can take 60% drops without giving in, just as few people are willing to sink their paycheck into a company that’s been losing value almost relentlessly for 500 business days.
Finally, a lot of people try to beat the market simply because they think that’s how you get rich.
It’s a trap: it’s compound interest that makes us rich, not the exciting returns of a year, or even several years if we’re lucky.
An investor who earns the “average” market return for decades does not experience “average” enrichment: he crushes virtually everyone. As I mentioned earlier, this investor would have beaten the returns of 95% of the pros for 20 years.
Imagine: joining the ranks of Michael Jordan or Tiger Woods without lifting a finger. Impossible, in real life. In investing, it’s not only possible, it’s common.
Thus, $100 theoretically invested each month for 50 years in a portfolio of index funds according to the formula of 60% Canadian, American and international equities, and 40% bonds, gives $1 million today, according to calculations by Justin Bender, of the firm PWL Capital1. In its worst year, such a portfolio lost a quarter of its value.
You don’t have to be a genius or a visionary to turn $100 a month into $1 million. Only to stop wanting to beat the market.
Read this week:
“Twenty years from now, the only people who will remember you working late and missing family dinners are your children. »
The question of the week
Are you trying (or have you ever tried) to beat the market?