Just buy and hold the index

Just buy and hold the index.

For one simple reason: You get an average result for much-below-average effort.

There’s another more elegant reason. To quote Buffet:

“If Group A (active investors) and Group B (do-nothing investors) comprise the total investing universe, and B is destined to achieve average results before costs, so, too, must A. Whichever group has the lower costs will win.”

Active investors (stock pickers) are trying to get an above average return, but they can only do so by making a different active investor get a below average return. They are playing a zero sum game with high effort.

And most strangely, there doesn’t appear to be much evidence of consistent skill. Out of 2,132 active mutual funds analyzed over a five year period, not a single one achieved consistent outperformance.

Read the Study.

Or better yet, don’t read the study. Just buy and hold the index.

Why the holding part is important

Note I said: “Just buy and hold the index”. The reason holding is important is that selling and rebuying periodically, even if it’s an index fund, is still a form of active management. It’s market timing, and it generally doesn’t work.

Try a market timing simulator here.

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