Beat the market vs. capture the market
Posted on: February 4, 2012
Last month, I was approached by a plastic surgeon whose money was with Morgan Stanley Smith Barney. He was looking for someone who could beat the market: not just promise to beat the market, like his financial advisor, but actually deliver.
I told him that I can’t beat the market, I can only help him capture the market. I could see a wisp of disappointment flash across his face.
The market can be thought of as the collective wisdom of all participants. To beat the market I must be smarter than all of them combined. I know I am not that smart.
Capturing the market is nothing to sneeze at. Look at the table above (source: DALBAR, inc.) that compares the 20-year returns of the S&P 500 and the average equity investor. You will find that the equity investor lags the market by a huge margin consistently.
Take the 2010 entry for example. From 1991 to 2010, the S&P 500 returned 9.14% annualized, while the average equity investor during the same period only earned 3.17% annualized. The average investor did that by timing the market, picking hot stocks, and chasing hot money managers, etc.; all the things that generally lead to “buy high, sell low”.
If those investors had been my clients, I would have made sure them think twice before they shot from the hip, and they would have captured most of the missing returns – 5.31% annualized. That is 170% more money in 20 years!
Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.
Share this:
2 Responses to "Beat the market vs. capture the market"
February 5, 2012 at 4:46 pm
DIY,
Right on.
Investing is quite simple: have a reasonable asset allocation plan and stick to it. However it’s hard for ordinary investors to carry it out:
1. The financial industry is constantly dangling the seduction of “beat the market.”
2. Our reptilian brains want us to “do something, just do something” whenever the market falls.
I figure if I can help my clients avoid these two pitfalls, I am probably worth more than the money they are paying me.
Michael
The Investment Scientist 
February 5, 2012 at 3:58 pm
The disappointing thing is that many people have to go through the experience of sub-par experience before they see the value of indexing. A 65% stock/35%bond portfolio has quadrupled your money over the past 20 years with reasonable volatility.
This message is kept secret by much of the financial services industry.