I have some bad news for you. Someone, somewhere has a portfolio that is doing better than yours is. It might be Warren Buffett or your neighbor or your worst enemy (the latter two are often the same thing). The thing is, when we put together portfolios we have to remember a few hard truths about the markets:
- All outstanding financial assets are held by SOMEONE.
- The stock market tends to rise about 75% of the time. This means that anyone holding cash and bonds (the instruments which represent the majority of outstanding financial assets) is underperforming relative to stocks during these periods.
- We generate the post-tax and post-fee return of the aggregate of all these outstanding financial assets. So, in the aggregate, WE ALL underperform the elusive aggregate index of all outstanding financial assets after taxes and fees.
This is why thinking of the financial markets at a macro level is so useful. You learn to stop worrying about the fallacy of composition that so many other people spend their days thinking about. And this puts things in a much clearer perspective:
- Trying to consistently “beat the market” is actually a fairly silly endeavor.
- The only way to guarantee better returns is to reduce the impact of taxes and fees.
- You’re not competing against your neighbor, Warren Buffett or your worst enemy.
In fact, you’re only competing against your personal financial goals. For most of us, this means maximizing our primary source of income and generating a return in our savings that beats inflation and does so without a substantial risk of permanent loss. Do that and you’re beating the majority of other investors out there who will waste much of their time and money on fees and taxes while chasing a pre-tax and pre-fee benchmark that is always elusive.
The bottom line is – the grass always looks greener somewhere else, by definition. Rather than continually chasing your own shadow from yard to yard you’re better off finding a low fee and tax efficient portfolio that reflects your personal financial goals and is able to maintain an asset allocation that is in-line with your risk profile over time. This won’t guarantee the best performance every year relative to the current hot trends, but it will substantially increase the odds of meeting your financial goals.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.