The evidence is everywhere and someone should spend 15 minutes shoving it under the nose of any member of Congress who first shows up in Washington. Where to start
Extremely active investors, such as Ms. Loeffler and Mr. Perdue, could start with the classic newspaper “Trading is dangerous for your assets” from 2000, in which records from over 66,000 households showed that the annual returns on am most of the people trafficked were 6.5 percentage points lower than the overall market.
Next, they could move on to what another group of scholars thought was the first analysis of the actual portfolios of Congressmen between 2004 and 2008. Turns out they weren’t great at this investing thing and would have done better in base index funds. If they had invested $ 100 this way, they would have ended this harrowing period with $ 80. Instead, the average member who felt above average received $ 69.
Stocks jump around a lot. Past performance is no indication of future success. If you don’t believe it, check out the Stock Pickers Chart on the website of a company called Index Fund Advisors. It rearranges the performance of 18 well-known stocks in each of 20 years before your eyes.
To deepen this thought, consider an analysis by the Dimensional Fund Advisors: if you examine the total top 10 percent of stocks every year since 1994, an average of less than a fifth makes the top 10 in the next year. “Investors with concentrated portfolios may miss out on the very stocks that make the most of what the market has to offer,” the company notes.
According to another study, the top 4 percent of stocks have contributed to total net income in the stock market since 1926. Buy index funds, the logic of which can be seen in several research notes on the Vanguard website, and you. I get any security that makes up the 4 percent for the next 100 years.
Why are so many people using other strategies instead? One reason could be ignorance. Or hubris, born in the last decade when stocks were mostly up. Lots of people like to play too. And now that companies like Robinhood have brought down the transaction costs of active trading, it’s just so tempting to ditch your luck, especially if you are bored during a pandemic.