We overpay for a lot of things on the presumption that price and quality are closely connected — perfumes, wine, certain restaurant experiences, travel. Even investments.
While it’s true that some things are much better than others, it’s also true that just about anything can be commoditized and made more cheaply. Just recently, a $6 bottle of wine sold by Walmart in Britain won an award.
That’s right, a $6 bottle sold by a mass market retailer is considered one of the best wines in the world. You can get La Monda Reserva Malbec, a Chilean red, only at Asda stores in the U.K. Good luck with that; their website crashed with news of the award.
The larger point is that commodification is not a bad thing, especially when it brings quality into a price range that anybody can afford. The very same thing has happened with investing.
It used to be that investing was hard work. You needed a stock broker to even get access to common stocks, and commissions were high.
Even so, knowing which stocks to buy was important. Trading was slow and illiquid. It was hard to get into a company at the right price and easy to make mistakes.
Faster forward a decade or two and now millions of ordinary people invest in common stocks. The sheer demand has created a much more liquid market.
Access to the tools you need to invest safely have declined in price, too. First through mutual funds and then, soon after, through index funds and exchange-traded funds.
Now it costs very little to create a risk-adjusted portfolio that can hold its own against even highly paid professional money managers. The value of trying to “trade against” the markets virtually has been eliminated.
Not that it’s impossible to beat the market average, just that it’s very unlikely to do so consistently and the cost of trying easily overwhelms any advantage you might have accrued in the effort.
In fact, trying to trade against professionals (and plenty of amateurs still, it must be said) only increases your risk of loss.
Why not go the cheap route, save the trouble and have as good or better an experience as anyone out there at a fraction of the cost? Why not have that $6 bottle of wine and just enjoy it?
The reason, for many investors, is that their own egos won’t let them. They really do want to try to “win” at investing, even if that means greatly increasingly the likelihood of losing.
Retirement investing isn’t a contest with winners and losers. Your investments will grow and compound so long as you invest and avoid emotional mistakes along the way.
Will you make more than your neighbor when it comes to annualized returns? Most probably, since you are less likely to blow it all late in the process on an ill-advised gamble.
Even if you do about the same as most investors, that’s good enough to retire, then spend your golden years enjoying a few $6 bottles of really nice Malbec, and perhaps a few laughs.