2. Myths of beating the market
It sounds exciting. You get a prospectus from a hot fund that had stellar returns last year. The fund manager is in the news, having recently bought a mansion in some exotic location. But before you commit your nest egg to this type of fund, consider reality. Beating the market is a lot like beating the House in a casino. It does happen, but odds are heavily against you. The casino hopes that the allure of big bucks will keep you motivated so they can continue to take your money. The truth be told, Wall Street operates in much the same manner.
The odds
Let's take a look at the odds on Wall Street. How often do the highly paid money managers actually deliver returns that are better than market benchmarks? After 10 years, 90% of all pros will not consistently beat their benchmark. And after 20 years, nearly all will underperform the market by 3%.
So if you read about how complicated the market is, and how you shouldn't try this at home, consider the source. Keep in mind that Wall Street is selling market mystique. By convincing you that you can't do it alone, they can keep their hands on your money and continue to stay profitable. Say goodbye to Wall Street.
The ends
Here's one of the darkest secrets of Wall Street. Do the money managers really need to beat the market? The short answer is "No." Sure, good performance helps attract more investors. But the fund will continue to earn its fees year after year whether it's beating the market or in the doghouse. What Wall Street really cares about is having your money in their hands.
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What The Experts Say
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