One of the websites which is frequented by many of our clients and is thus on my radar is Yahoo! Finance. I admit that I regularly find myself worried that people may be derailed from their long-term investment strategy by the headlines and ads used to stir up investors. The ad I came across today (pictured above) takes the cake.
“Beat the market.” Just download the Yahoo Finance app, and you’ll be on your way to market-beating returns in no time! This is so conspicuously silly that, at first, I just shook my head and kept reading. But the more I think about it, the more I worry that investors are actually enticed by this message. Otherwise, why would Yahoo advertise this way?
Of course, our clients have been thoroughly inoculated from this sort of thinking, but for those investors who are still chasing the unicorn, let me attempt to illustrate the folly. Let’s break down what it means to try to “Beat the market.”
First, what do we mean when we talk about “the market?” “The market” is simply a collection of individuals and institutions who come together to buy and sell stocks. It is comprised of individuals like your neighbors, your friends, and your great-uncle Fred. It is also comprised of institutions like your company’s pension or retirement plan, endowments and charities, and professional mutual fund managers. If that is the case, why do we care about beating them? The purpose of investing isn’t to beat other investors. It isn’t a race. For most of our clients, the purpose of investing is to provide for a comfortable retirement (or some other personal goal like paying for college or saving for a down payment on a house) and to pass hard-earned wealth on to children, grandchildren or charity.
That leads us to the second problem with attempting to “Beat the market.” If investing is about achieving your own unique and personal financial goals, the best way to accomplish those goals is to build a diversified portfolio which includes investments in assets that don’t act the same way under the same economic conditions. That means that in addition to stocks we own investments in things like bonds, real estate, commodities, and alternative strategies, which don’t act like stocks most of the time. Why would an investor compare a diversified portfolio to an all-stock “market” benchmark? This is classic apples-to-oranges comparison.
I suppose human beings are hardwired to be competitive, and Yahoo’s ad appeals to that competitive nature. If you’re one of those people who are enticed by the prospect of beating the market, I ask you to think hard about the bogey you’re chasing. Does it really matter if you beat the market? Is it really worth the risk to try?