{"id":5152,"date":"2015-05-28T10:00:33","date_gmt":"2015-05-28T17:00:33","guid":{"rendered":"http:\/\/canary.kcprod.info/blog\/?p=5152"},"modified":"2022-01-11T17:12:34","modified_gmt":"2022-01-12T01:12:34","slug":"beat-market","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/beat-market\/","title":{"rendered":"How To Beat The Market"},"content":{"rendered":"

There are a million web sites, books and pundits who will tell you that you can\u2019t beat the market.<\/p>\n

They\u2019re all wrong.<\/p>\n

Or, at least, they\u2019re not framing things correctly. And I think that\u2019s a major problem.<\/p>\n

My Wife\u2019s Disappointment<\/strong><\/p>\n

This thought occurred to me the other day when I was hiking with my wife in the redwoods of Muir Woods National Monument, outside of San Francisco. We were hiking and talking and, as sometimes happens, we started talking about investing.<\/p>\n

I was telling her about automated investment services like Wealthfront and what they were doing for the world. I explained how they built broadly diversified, optimized portfolios that are managed at extraordinarily low costs. I talked about how they employ tax-loss harvesting and automatic rebalancing to keep your money at work all the time. I also explained\u00a0how they provide institutional-quality portfolios for people with real-life-sized pocketbooks.<\/p>\n

Her response nearly flattened me: \u201cSo do they beat the market?\u201d<\/p>\n

I\u2019ve been working at a firm called ETF.com<\/a> for nearly a decade, and have been preaching the indexing gospel for longer. I\u2019ve done speaking tours with people like Charlie Ellis (one of Wealthfront\u2019s key advisors<\/a>) and shared the stage multiple times with Jack Bogle (the founder of Vanguard). The idea that my wife would still hold onto the hope of beating the market came as a shock.<\/p>\n

After I regained my composure, I explained (again) how you can\u2019t actually beat the market, and how these new tools did an amazing job matching the market at low costs.<\/p>\n

\u201cThat\u2019s not very exciting,\u201d she said.<\/p>\n

I couldn\u2019t believe it. These services are one of the most exciting things I\u2019ve seen in finance in the past two decades, and my wife found them \u201cboring\u201d because they couldn\u2019t beat the market.<\/p>\n

I tried a half dozen other ways to get her hooked. I explained how tax-loss harvesting<\/a> would put money in her pocket every April, which she thought was reasonably cool. I talked about the effortless user experience, and all the other things the service could do down the road. She found all that interesting at some level, but her overall response was \u201cmeh.\u201d<\/p>\n

We walked along for about a half a mile in silence while I tried to figure out how to get her excited. And then it hit me: You can<\/em> beat the market with these services. You just have to reframe what the market is.<\/p>\n

How Index Funds Beat \u201cThe Market\u201d<\/strong><\/p>\n

Despite marrying me, my wife hates \u201cWall Street guys.\u201d She thinks they make too much money and don\u2019t do much good for the world.<\/p>\n

So I tried a different tack.<\/p>\n

\u201cYou know the Wall Street guys?\u201d I asked. \u201cThe ones who make all the money? They have all the resources in the world and all the advantages in the world and these simple, software-driven portfolios will beat them over the long haul.\u201d<\/p>\n

\u201cBeat them?\u201d she asked.<\/p>\n

\u201cCrush them.\u201d<\/p>\n

\u201cHow\u2019s that?\u201d<\/p>\n

I explained that investing is, in a competitive sense, a zero sum game. Investors as a whole own the entire market, and so on average they must generate a market-average return before costs. <\/em>But all the costs of trying to beat the market \u2013 all the trading, commissions and manager salaries — take a real toll on returns.<\/p>\n

As a result, over the past five years, more than 88% of actively managed large cap equity funds trailed the market when fees are taken into account. <\/em>For small-cap funds, that number was 89%. In fact, no matter what category you look at, actively managed funds consistently lose to the market by a wide mark. And when one fund gets lucky one year, it\u2019s extremely unlikely to repeat that in the future.<\/p>\n

Here is the latest data from S&P on the topic, showing the percentage of U.S. equity funds that trailed the market in different categories over the past five years.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n
S&P Dow Jones SPIVA (Index vs. Active) Scorecared – 2014<\/strong><\/td>\n<\/tr>\n
Category<\/strong><\/td>\nComparison Index<\/strong><\/td>\nPercentage of Funds Outperformed by Benchmarks in Past 5 Years<\/strong><\/td>\n<\/tr>\n
All Domestic Equity Funds<\/td>\nS&P Composite 1500<\/td>\n80.82%<\/td>\n<\/tr>\n
All Large Cap Funds<\/td>\nS&P 500<\/td>\n88.65%<\/td>\n<\/tr>\n
All Mid-Cap Funds<\/td>\nS&P MidCap 400<\/td>\n85.37%<\/td>\n<\/tr>\n
All Small-Cap Funds<\/td>\nS&P SmallCap 600<\/td>\n86.55%<\/td>\n<\/tr>\n
All Multi-Cap Funds<\/td>\nS&P Composite 1500<\/td>\n84.02%<\/td>\n<\/tr>\n
Real Estate Funds<\/td>\nS&P US Real Estate Investment Trust<\/td>\n91.49%<\/td>\n<\/tr>\n
* Source: S&P Dow Jones Indices. Data through 12\/31\/2014.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

By comparison, new services like Wealthfront drive costs down to the absolute bare minimum, so over time, they beat the vast majority of those Wall Street professionals. They also add features like automatic tax sensitive rebalancing, tax-loss harvesting, Stock-level Tax-Loss Harvesting<\/a>\u00a0and optimal allocations to further improve results. If you think of \u201cthe market\u201d as the returns experienced by all other investors, they do \u201cbeat the market\u201d \u2026 handily.<\/p>\n

\u201cThat\u2019s pretty cool,\u201d she said.<\/p>\n

Index-based investing gets painted as settling for average, when it\u2019s anything but. A well-built, low-cost and tax-optimized portfolio will dramatically outperform the vast majority of other investors over time.<\/p>\n

\n

Disclosure<\/strong><\/span><\/p>\n

Nothing in this article should be construed as a tax advice, solicitation or offer, or recommendation, to buy or sell any security. While the data used from third parties is believed to be reliable, there is no guarantee of the accuracy of the information. There is a potential for loss as well as gain. <\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

There are a million web sites, books and pundits who will tell you that you can\u2019t beat the market. They\u2019re all wrong. Or, at least, they\u2019re not framing things correctly. And I think that\u2019s a major problem. My Wife\u2019s Disappointment This thought occurred to me the other day when I was hiking with my wife […]<\/p>\n","protected":false},"author":101,"featured_media":7251,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1282],"tags":[2108,2109,2110,1362],"coauthors":[2107],"class_list":["post-5152","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-beat-the-market","tag-etf-com","tag-matt-hougan","tag-wealthfront"],"acf":[],"yoast_head":"\nHow To Beat The Market | Wealthfront<\/title>\n<meta name=\"description\" content=\"Can you beat the market? 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