The Market Is Hard (But Not Impossible) to Beat

When friends and family with limited investment expertise ask me how they should invest, I tell them to stick to low-cost total market index funds. That may seem like a naïve approach. After all, there are plenty of people who make uninformed investment decisions and many smart investment managers who attempt to take advantage of them.

Yet, it’s hard to beat the market. Most who try fail. Everyone’s looking for high-return, low-risk invest­ments. When they arise, money tends to come flooding in, driving up prices and cutting future returns to a level proportionate with their risk. As a result of stiff competition among investors with diverse perspectives, market prices tend to do a good job reflecting publicly available information. This makes it difficult to carve a durable edge. While inves­tors aren’t perfect, many of the mistakes they make are uncorrelated. This makes the whole better than the sum of its parts over the long term.