I get into discussions about index investing versus stock picking versus trading all the time. And while I am a huge advocate for index investing, what I’m telling you today is that index investing is for losers. But I also want to tell you how you can become the smartest person in the world by doing just one thing… tossing a coin.
Welcome to Loserville – population: You
Index investing is exclusively for losers. No winners here. Just a big L. That statement may come as a surprise to you, especially if you have followed my blog, twitter or YouTube channel for any length of time.
I’ve been investing in index fund for nearly three years now and, as a result, pretty much all my investing is in low cost ETFs to track the markets across the globe. But every year, I am proven to be a big old loser.
Does that bother me? No.
Do I think that will prevent me from being successful as an investor? No
Do I think index investing will get me to where I want to be? Yes.
So why am I ok with being such a tube?
Let me explain.
Index investors come in for a lot of stick and here’s why – It’s boring. It’s drab. It’s lights out before 10pm on a school night. Anyone looking in on portfolio updates will surely see they are turgid affairs. You’ve seen one, you’ve seen ’em all. I know they are. I do them myself. It’s hard to get excited about adding another few quid to an all world tracker every month. <insert into clip here and pull a face> Consequently, it’s even harder to get other people excited about it. Uninspiring, insipid, tedious. Enough to make you feel like a loser, isn’t it? Nothing spicy.
Well, that’s a little bit anecdotal. A little bit melodramatic, but it’s true, index investors are losers pretty much every year.
And here is why…
Index trackers track a market, never beat it.
The first reason is index investing will track a market. Never beat it. You will never beat the index with an index tracker, but rather sit ever so slightly below the market growth in the good times and the bad. For example, let’s look at Vanguard’s VUSA. If it rose 12% over the last 10 years, you could expect your tracker to return something very close to that 12% but not quite on it. Feels slightly, I’ll say it again, boring. From this point of view, it’s all a bit “always the bridesmaid, never the bride” sort of thing.
ARKK made me an index investing loser
Here’s reason number two – every year index investors have to look around and see some other asset class, or some other particular stock flying and dwarfing their meagre index investing returns. In 2020 ARKK Innovation and Cathy Wood became the talk of the town as her ARKK fund battered all in front of it. Enormous returns. If you were in on that, or had some way to replicate that then great and good for you. I wasn’t, though, and there were lots of people tell me I should have been.
I had to put up with my loser market returns while Cathy Wood and her squad turned everything they touched into gold. It’s not going so well right now but that’s not my point. The point is in 2020 my index fund was a loser. I could have had better. Maybe I should have shown more guts? Maybe I should have got my magic coin out… I’ll get to that very soon.
Crypto made me an index investing loser
If 2020 was Cathy Wood, then 2021 was rise of crypto once again. My Twitter feed full of of rockets, laser eyes… “to the moon!”. Seems you could pick any old Ponzi scheme and get rich. On paper at least. I had lots of crypto “specialists” celebrating their victories and I’m glad for them. Genuinely glad. But there was I, once again, stuck with my index trackers. I made that decision not to buy $STRONG and stuck with it.
I hope people got out again in time, but that’s another issue altogether. My point is I had to sit on the sidelines and watch people with impeccable timing make a fortune buying and selling magic internet beans with dog faeces all over them. Faces. I mean dog faces.
The simple scenario is that every year, something will beat your humble index tracker. That’s a fact. Get used to the reality that something is going to beat it. It could be another stock, it could be real estate returns, crypto it could even be bank interest! Rest assured your index tracker will lose against the best performing asset of that year, and you can be certain you will be told about it!
Have faith in being an index investing loser
The thing is, you likely won’t be a loser to the same thing two year in a row, and almost certainly not over the long term.
The reason is it’s very hard to keep getting it right. Cathy Wood is a good example. Flew so high in 2020 and has struggled a bit since. Her company and her products might well come back. Nobody knows for sure. Nobody is a fortune teller. To do better than an index investing loser like me, you will have to keep on making the right decision leaping onto the right asset at the right time.
But it’s hard, you know? As an index investing loser, it’s hard to appreciate that there will always be something that beats you. Hard to accept that your index tracker will never, ever, not once in your investing life be the top dog asset. Even in the best index investing year you will ever have, never will your index tracker be king.
I don’t want to be an index investing loser
Let me offer you an alternative outlook and some hope in index investing.
Let me assume you are indeed a long term investor, you saw the title and thumbnail and you clicked this video looking for a fight. Therefore, I will also assume you are buying your index funds because you believe in diversified, appreciating assets and you were ready to tell me I’m a tube in the comments below <get some mouthy comments>. Let me also tell you that this simple index investing strategy is very unlikely to be beaten over the long term by pretty much anything.
An index fund isn’t sexy but over time it has proven to be pretty much the best way to invest. Many people have tried to beat it but few have over the long term. Sure, one or two could have a few good years where things run well and one or two might even have a run where they look unstoppable. Eventually though, the market catches up with them. Even the brightest and best can’t beat the market over a long period of time. Nearly 90% of fund managers can’t beat the index over 15 years. What makes you think you can?
And I hate to bring up our mate Cathy Wood again, but she had a stellar 12-18 months which catapulted her into the limelight when honestly, very few had heard of her before that. It wasn’t the first time someone had gained massive popularity because of an amazing short-term run.
Be the smartest person in the world
Which brings me round to becoming the smartest person in the world by doing this one thing.
Let’s say you have a room of 128 people. I’m holding a regular coin here. A regular old 50p. Not one of those rare ones worth thousands of pounds. No, just a normal one. From my index investing ISA. I’ll be putting it back after this.
A normal 50p piece. Heads or tails I’ll ask the room. 64 say heads, 64 say tails.
Half the room are eliminated. We go again with the remaining 64, 32 heads and 32 tails and we are down to 32. Go again, down to 16. 8 then 4 then 2 then 1.
The one that is left is the one who made all the calls correctly and that’s the fund manager you hear about.
This, is Cathy Wood.
Or it could be the guy who went all in on Dogecoin at the right time.
This is Survivorship bias the idea that the subgroup, the successful few are representative of the many.
The fact is, it is incredibly hard to be right all the time. The true representation of the many are the 127 people who all lost money, trying to be the one to get it right.
Do this next…
It’s why I’m happy to be a perennial loser in the stock market. I’ll take my market wins and losses, continue to invest for the next 10, 20 years and check back in some time in the future, rather than chase the next new hotness.
Because while the past is no guarantee of future performance my index investing and the trackers I put my money into are built on the back of strong businesses who have done well over many, many years and I’ll take that instead of trying to win the lottery.
I do my index investing with InvestEngine, and until 12th December 2023 you can get £25 free when you invest at least £100 for 12 months. Your investments can go up and down. InvestEngine are FCA regulated and take part in the FSCS scheme. Check out some of my InvestEngine articles next.