Vanguard founder, John C. Bogle accurately stated, "Nobody knows how to outfox the market, because that requires outfoxing virtually all other investors."
This observation has major ramifications for investors.
Barry Ritholtz does a great job at explaining the significance of acknowledging what we don’t know. He quotes a respected, sophisticated investor who states, "I don’t know how the market will perform next year. I don’t know if stocks will be higher or lower in five years. Indeed, even though the probabilities favor a positive outcome, I don’t know if stocks will be higher in 10 years."
It’s not just that some people don’t know these things. They are, in fact, unknowable. While many pundits love to give their opinions, no one can predict the unpredictable.
Once you accept this reality, your approach to investing should change significantly.
Investors waste enormous amounts of time trying to find patterns where none exist; attempting to pick stock “winners’ or identifying the next “hot” active managed fund manager.
These activities are not just counter-productive. They are an enormous waste of time.
The massive inflows into index funds and passively managed funds, and outflows from actively managed funds reflect this reality. Investors – it seems – are starting to understand what they don’t know.
Here’s the secret Wall Street really doesn’t want you to know.
When you stop engaging in useless predictions and other discredited activities, and simply capture market returns (which are yours for the taking), you achieve superior returns. Financial journalist Larry Swedroe noted that, when you invest in index funds, …you’re also virtually certain to outperform the vast majority of active investors trying to beat the market.
Here’s what you need to know.
By giving up the slim possibility of outperformance, you increase the odds of meeting your retirement goals.
That’s investing wisdom.
This blog post by Barry Ritholtz is a gem that should be read and re-read by every investor.