Your grandma's 40/60 portfolio crushed the average investor's return over 20 years.

It is really hard to explain to people that timing the market and trading around are things that don’t mix well with wealth creation. No one wants to hear it, they know what the next hot stock is and they know when they should enter the market.

You can join the casino of stock picking with not a care in the world for the amount of risk you are putting on your money, just trying to ride the next high.

Or you can jump on the market timing merry-go-round, it’s awesome at helping people miss out on opportunity. It goes around and around, on one side everyone claims they’ll “get into the market when it cools down” and on the other, they claim they’ll “get into the market when things look better.”

Newsflash: there are always 101 reasons not to invest. There’s always something going on. Maybe it is a pandemic, maybe the Fed is cutting rates, maybe stocks are at all-time highs, maybe there’s an election or something like that…

Either way, I actually looked, and it appears that stocks generally go up over long periods of time. You can look too if you search “S&P 500 Index since inception.”

So, you might wonder, “How could Cliff possibly make another argument against picking stocks and timing the market?”

I’m a big “numbers don’t lie” guy and JPMorgan has some amazing research on this topic. This is one of the most mind-boggling statistics that I have come across in my career. Every single time I see it, I am absolutely dumbfounded. JPMorgan actually has the data on the returns of the average equity investor over a 20-year time span.

Damn, that’s a tough look for the average investor. And all they had to do was invest in an index? Even your grandma’s 40/60 (40% stocks, 60% bonds) portfolio smoked the average investor.

How is it that there is such a giant spread between your average investor and the index’s return?

A simple answer is psychology. A finite number of people were put on this earth to consistently make winning bets in the market. For the rest of us, we’re lucky because low-cost index funds exist.

So long as we use them…

Don’t become your own worst enemy. 20 years in the market to underperform the index by that large of a margin will significantly impact your wealth.

$100,000 compounded annually at 7.5% for 20 years turns into $424,785

$100,000 compounded annually at 2.9% for 20 years turns into $177,136

2.9% annually is barely keeping pace with inflation. That is when it gets really scary. You’re nearly treading water at that point.

When the industry talks about “alpha” they are usually measuring the excess return of a portfolio relative to an index such as the S&P 500.

I prefer alpha to be measured by the average performance of our peers. Too many of us are “seeking alpha” when it’s been right in front of our faces the whole time.

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