Be A Lazy Investor - Part One

Ran across a list of 10 counterintuitive ideas for stock investors. One of the points struck me as being very insightful:

Hard work hurts...(w)orking hard at investing often backfires. Folks diligently research stocks and mutual funds, hoping to earn market-beating gains. But while those gains aren't guaranteed, all the activity may lead to high trading costs and steep tax bills, thus hurting returns.

This axiom goes against everything people are taught. How many times has someone said that if you work hard you will get good grades, or you will be prompted or you will get some other type of reward. This piece of advice seems to go against our very moral fiber as Americans.

But I think that it makes a lot of sense and if followed probably would make things a lot easier when it comes to investing.

It is human nature to think that you are better stock picker than you really are. If most investors accept the fact that they probably just average it could really simplify their investment decisions. Instead of spending hours and hours looking for the next big stock, they could just buy shares in an ETF that invested in the entire stock market. Instead of researching the hottest sector mutual fund, they buy shares in a fund with low expenses and fees.

Source:yahoo.com

Above is a chart for Bear Stearns compared to Vanguard Total Stock Market ETF over the past year. This is a bit of an extreme example of the axiom that Hard Work Hurts. You could have spent a ton of time reviewing the financials of Bear Sterns, invested in it and ended up losing a bit of money, like Joe Lewis, he is down $800 million. If you had just invested in Bear Sterns a year ago, you would have lost 96% of you investment, compared to a loss of 7% with the ETF. Which investment would you have rather been in?

It seems that it would be ideal to develop a portfolio of investments that required very little effort from the investor, yet provide a return that meets or beats the market. I will explore this in an upcoming post.

Source:
"Falling Down the Market Rabbit Hole", Jonathan Clements, WSJ {$$$}