Thursday, March 22, 2007

More on Average Joe Beating the Market

Anyhow, to continue with the line of thought that the Average Joe investor can beat the market.... This is a little disjointed, but hopefully worth a read.

In a previous post I've posted some longer term data showing it is possible to beat the market by a fairly wide spread over an extended period of time. The trial portfolios were made up of low maintenance holdings (mostly buy and hold for many months at a time) and are generally not obscure stocks. There's nothing about these funds that I don't think a somewhat involved and informed "Average Joe" investor couldn't emulate.

For example, on the longest running fund (SMF), the 5 most profitable investments over the life of the fund are CTSH Cognizant Technology, BBY Best Buy, INFY Infosys, GRMN Garmin, and CHS Chicos FAS. For folks that follow the markets, you'll recognize that none of these stocks are obscure or out of the mainstream investing knowledge. (I'm trying to point out you don't have to take risky long shots on unknown companies).

Consider this: According to the Motley Fool "three out of four mutual funds don't beat the market." (While I've pretty much foregone mutual fund investing for the do-it-yourself approach, I am a fan of the Motley Fool approach to investing that thinks there are still great investments out there to be found.)

On the other side of the argument: Here's an excellent article by John Bogle of Vanguard fame . Bogle is a supporter of the prevailing efficient market hypothesis and argues the best approach is simply to buy index funds and try to keep management costs as low as possible. I disagree on that point and think there's still a good chance for the Average Joe to beat the market, but in any event, it's staggering how much of your potential profit of mutual fund holders is syphoned off by both below average mutual fund performance and expenses/fees. He puts forth a compelling case to at least go with the lowest expense alternatives possible if you go the mutual fund route.

Bottom Line: If you have the capability and inclination get involved in understanding your investments. Small decisions now can mean hundreds of thousands or millions of dollars of difference in retirement assets then.

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