Someone, Somewhere is Outperforming Your Portfolio

June 4, 2015


The website, Pragmatic Capitalism has some bad news for you. Someone, somewhere has a portfolio that is outperforming yours. It might be Warren Buffett, some hedge fund guru,  your neighbor or your brother-in-law. When we build portfolios we have to remember a few hard truths about the markets:


1. All financial assets are held by somebody, somewhere in the world.


2. The stock market tends to rise over two-thirds of the time. This means that anyone holding cash and bonds ( the majority of outstanding financial assets) is underperforming relative to stocks during those times.


3. When we look at benchmarks or averages, we have to remember those don't account for taxes or fees. But investors have both. So, in the aggregate, we, as a group,  underperform the elusive aggregate index of all outstanding financial assets after those costs.


This is why thinking of the financial markets at a macro (big picture) level is so useful. You learn to stop worrying about the fallacy of composition (inferring that something is true of the whole from the fact that it is true of some part of the whole) that so many other people spend their days thinking about. This puts things in a much clearer perspective:


1. Trying to consistently “beat the market”, or beat the collective wisdom of us all, is actually a fairly silly endeavor.


2. The only way to guarantee better returns is to reduce the impact of taxes and fees.


3. You’re not competing against your neighbor, Warren Buffett or your relatives.


In fact, you’re only competing against your personal financial goals. For most investors, this means maximizing  primary sources of income and generating returns on savings that beats inflation and does so without a substantial risk of permanent loss. " Do that and you’re beating the majority of other investors out there who will waste much of their time and money on fees and taxes while chasing a pre-tax and pre-cost benchmark that is always elusive", the web site concludes. 

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