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Stages of Investing "I
manage people's money. Until they don't have any." There are predictable passages that people go through in their investment life. Stage One: Active Management First, a broker calls. Or, you invest in stocks on your own, following some newsletter or guru. All those nice people we see on CNBC -- they must know something, right? According to a study by FundExpenses.com, from 1998 through 2002 mutual fund investors spent $120,000,000,000 purely on stockpicking expertise that lost them in aggregate 34% of their money. Perhaps you are a high-net worth investor with a 'platinum' account at a prestigious bank or brokerage house. There's a saying from poker that applies: "If you don't know who the mark is after 30 minutes -- it's you." Stage Two: S&P 500 Index Investing Instead of siphoning your money to the financial services industry, you buy an S&P 500 Index fund. Congratulations! You own a tax-efficient, low-expense, diversified investment. The following table from John Bogle shows how much your performance improved by owning the S&P 500 Index vs. the average actively-managed mutual fund from 1980-2005.
After inflation and expenses, the S&P 500 investor earned 9% annually, versus just 4% for the typical fund investor. If you own the 'Couch Potato' portfolio (50% Total Stock Market Index, 50% Total Bond Market Index), you will likely outperform the majority of active investors on a risk-adjusted basis over the long run. Even better, if you are looking for a terrific investment strategy (and can't afford Conservative Wealth Management LLC's usual one million dollar minimum), consider Scott Burn's "Margarita" Portfolio: 1/3 each of Vanguard Total Stock Market Index (VTSMX), Vanguard Total International Stock Market Index (VGTSX), and Vanguard Inflation-Protected Bonds (VIPSX).
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