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11 Reasons to be Lazy and Average When Investing

When I was growing up my parents instilled in me a work ethic that has benefited me in athletics, academics and my career. I try to work hard at everything I do so that I can be as far above average as possible, and to provide for myself and future family. Investing goes against everything that I’ve ever learned. Investing in the stock market might be the only activity that you benefit from by being lazy and average. Here are 11 reasons why it pays to be lazy and average.

(Note: I’m defining lazy and average as investing in index funds and accepting that you will only earn the market average. I’m defining working hard and trying to beat the market as investing in actively managed mutual funds or buying individual stocks.)

  1. When you’re lazy and invest in index funds, you don’t have to worry about the volatility of the stock market and the ulcers that come with them. Bear markets are only paper losses. You don’t have to keep an eye on the market. Just sit back and let your hard-earned money grow until you’re nearing retirement.
  2. Index funds offer the broadest possible form of diversification, which reduces risk. Diversifying takes individual stock risk, style risk and manager risk out of the equation. All that remains is market risk, which is necessary to produce your returns.
  3. Since somebody has to sell the stocks you are purchasing, and vice versa, the market is a zero sum game. When you factor in costs, the market is a loser’s game.
  4. Index funds have significantly lower expense ratios than actively managed funds. Expense ratios are derived from management fees and operating expenses, both of which are nearly non-existent for index funds.
  5. Index funds don’t have sales charges.
  6. Portfolio turnover is minimized and some index funds (like those that track the S&P 500) have almost zero turnover. The average actively managed fund has a portfolio turnover of 100% per year. Higher portfolio turnover leads to higher costs through brokerage commissions and bid-ask spreads.
  7. Index funds allow nearly all earnings to fall into the long-term capital gains tax rate, which minimizes tax costs.
  8. Lazy investing takes human nature out of the equation. You won’t lose money trying to beat the market through market timing, which is almost certainly a losing strategy. Humans are prone to pouring money into the market when it’s high and selling when it’s low.
  9. Similarly, you won’t lose money by trying to pick the next hot sector or fund (reversion to the mean is brutal).
  10. Even if you find a good manager for a fund, manager turnover is so high that on average, within three years, you will be searching for a new fund or dealing with a new manager that might not have the same investing tactics.
  11. Inflation is every investors enemy, however, your average investor fears inflation less. Let’s say your average market return is 10%. On average, actively invested mutual funds will lose you 3.5% in costs, leaving you with a 6.5% return. If inflation is say 3%, the average investor experiences a diminished return of only 30%, however, the active investor experiences a diminished return of 46.2%.

In summary, stay away from the ulcers, don’t pay out some of your returns to managers, diversify away risk, don’t let human nature postpone your retirement and take part in the winner’s game, being average. Charles Schwab puts it best, “(with index funds) the predictability is so high… For 10, 15, 20 years you’ll be in the 85th percentile of performance. Why would you screw it up?” Don’t screw it up, be lazy and average!

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Continuing the Discussion

  1. Carnival of Personal Finance #193: YouTube Edition — Broke Grad Student linked to this post on February 23, 2009

    [...] Personal Finance Start-Up Blog presents 11 Reasons to be Lazy and Average When Investing. [...]