You might think that people old enough to be preparing for retirement — to say nothing of those who are already retired — would have learned at least the basic facts about successful investing. But in far too many cases you would be wrong.
I've identified five common beliefs — actually they are more myth than reality — that trip up investors of all ages. If they don't apply to you personally, I can almost guarantee that they’re true for somebody you know.
Myth No. 1: I can choose — or my adviser can help me choose — a money manager who will beat the market.
Reality: There is no evidence that any money manager has been able to beat the market every year. A very small fraction of them somehow accomplish this feat for years in a row. But nobody — and I really mean nobody at all — has found a reliable way to determine in advance which managers will do this.
Perhaps the most famous example is Bill Miller, formerly of Legg Mason Value Trust /zigman2/quotes/203623666/realtime LMVTX +0.69% . In 2006, Business Week named him one of the "Best Fund Managers." Miller had just finished an extraordinary streak of managing that fund to beat the Standard & Poor’s 500 Index /zigman2/quotes/210599714/realtime SPX -0.16% for 15 consecutive years.
You can be sure that a lot of investors pumped a lot of money into that fund based on those results. But Miller's performance quickly turned sour. For the 10 years ended April 30, this fund's compound rate of return has fallen into the bottom 1% of all funds in its category.
Oh, how fast the worm can turn.
Miller's case illustrates a basic fact of life for investors: You get no benefit from knowing who beat the market last month or last quarter or last year. If you and your money weren't there at the start, it's just academic history.
These facts are obvious to anybody who is paying close attention. Yet year after year, hope springs eternal. Wall Street does its best to cash in on that hope, promising a parade of experts eager to manage your money.
Advice: Focus on what you need instead of the returns of the vaguely defined “market.” Then invest in a way that increases the probability that you’ll get what you need without taking undue risk. What “the other guy” is making doesn’t have anything to do with your own success. One simple way to steer clear of the performance chase is to invest in index funds.
Myth No. 2: It’s hard to beat the S&P 500 index.
Reality: This is only true if you’re making this attempt by selecting individual stocks from among those that are in the index. In that case you are essentially betting that your picks will do better than all 500 of them together. There's some slight chance that will work, but statistically this is an almost sure way to underperform.
Actually, it isn't that tough to beat the index. The large-cap U.S. stocks that make up the S&P 500 have a lower long-term return than many other asset classes.
If you diversify widely in a mix of large and small, growth and value, U.S. and international stock funds, you will most likely beat the S&P. Although this won't happen every year, if you give this strategy some time, you may be surprised to learn how easy beating the index actually is.
Myth No. 3: I work for a company that I know well. Its stock is a good investment to hold in my retirement plan, especially since I can buy it at a discounted price.