I know this might be hard to imagine for most of us golfers, but which of the following scenarios would you rather choose:
1. Shooting par every time you go out and play a round of golf.
2. Shooting below par 25% of the time you play and failing to reach par the remaining 75% of the time
It’s an easy decision, right?
The game of golf has many parallels to investing. A score of par is similar to a stock index. It is the base score everyone is trying to reach.
Continuously shooting par, similar to passive (index) investing, is what we do here at Rockbridge. We try to control costs, manage risk and get as much return as the markets allow. With index funds, you always get what you expect when it comes to returns and are left with no surprises. It’s much like going out and shooting par every time you golf. Basically, we help you avoid the double and triple bogeys that we are all too familiar with!
The other scenario is to strive for a score lower than par, which is similar to active investing. You incur additional costs – Wall Street “experts”– in an attempt to beat the return produced by an index. However, evidence shows that you will only be able to do so 25% of the time. The remaining 75% of the time you will underperform; and to make matters worse, you will underperform by a much bigger margin than you will ever outperform! This makes perfect sense. When active managers continuously strive for outperformance, they must take additional risks which lead to mistakes. No different than a golfer trying to make eagle on every hole. He will find himself shooting much worse with that constant added pressure!
The situation only gets worse with time as well. Just like shooting a score below par gets harder as we age, your chances of beating index returns goes down drastically when you look at longer time periods. Over extended periods of time, your probability of beating index returns falls into the single digits! Larry Swedroe, in a recent CBS News article, goes on to state that this value is lower than what we would expect by sheer chance! When most investors are saving for long-term goals, like retirement, those don’t seem like odds I would be willing to pay extra for!
So, if shooting consistent pars on the golf course sounds like the no-brainer choice, then why do so many people still engage in active management when it comes to investing? In golf, spending additional time/money to improve your game might pay off in a lower score, but unfortunately this does not hold true when it comes to investing. Control costs and shoot for par (index returns) and you will be much farther ahead in the long run. Sometimes it takes a simple analogy to help lead us to making wiser and more prudent life decisions!
Other articles filed under Family Finances
January 14, 2019
I’ve been watching people drive all my life. I’ve been an individual investor and an investment advisor guiding clients for more than half of my adult life. I’m a curious soul and during recent trip from Syracuse to Atlanta, I...
January 11, 2019
Stock Markets December’s market reminds us that risk is real – even after the uptick at the end of the month, a global stock portfolio is down about 15% for the quarter and 12% for the year. Technology stocks (Amazon,...
December 28, 2018
Depending on the news you read, you may have come across headlines talking about bear markets and stock market corrections. The following is a guide to what they mean and how to put them in the context of history. The...
December 7, 2018
At Rockbridge, we believe that the role of an investment advisor is changing, and investors should be expecting more from their advisors than they have in the past. With options like Vanguard, robo advisors, and all the other investment-only solutions...
October 22, 2018
Stock Markets For the last quarter, stocks are up except for Emerging Markets, which were close to flat. Domestic stocks are seemingly shrugging off the uncertainties of increasing interest rates, trade wars and tariffs. Year to date, an Emerging Market...