Buy Yourself Some Time to Profit
By Scott Chan
As an investor, it's difficult to consistently beat the stock market.
Even the professionals have a hard time doing so. Analysts estimate that roughly 80% of actively managed mutual funds underperform their respective benchmarks.
The key word here is active.
Educated Guessing and Emotion Controlling
The stock market is forward looking. As an investor you have to make educated guesses about a company's future prospects based on currently available information and estimates.
At the end of the day, an educated guess is still just a guess. Reality can turn out very differently.
Additionally, you have to deal with emotion, which is counterproductive when it comes to investing.
Keep in mind that benchmark indices are passive. Their values change automatically based on the value changes of the index constituents. Whether the stocks in the index go up or down, the index will fully capture that movement. There's no such thing as human intervention to throw off the return of the index.
But when it comes to actively managed funds, managers often feel pressure to beat their funds' benchmarks and may end up making moves at the wrong time. They have to deal with the two challenges mentioned earlier, educated guessing and emotion.
Importantly, market indices aren't actual tradable products. You can trade exchange-traded funds (ETFs) that track an index, but not the index itself. There are no fees or expenses that reduce the return. Meanwhile, funds do charge fees and expenses, which lower the net return, which is the actual return for the shareholder.
If even professionals struggle, it's totally understandable why many individual investors tend to have even more trouble beating market indices. Simply put, individuals have access to less information and they generally have less experience keeping emotions in check. They often end up being followers. They buy after institutional investors buy and they sell after institutional investors sell.
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