The biggest trick in all of finance: simple is often the most sophisticated thing you can do.
It is counter intuitive, but we as humans are trained to believe that the more we pay for something the better it must be. We assume that there is a correlation between high prices and high quality. But when it comes to your personal finances, the opposite in fact usually turns out to be true. Researchers have shown over and over again, that the higher you pay for an investment, the worse-off you do, net of fees. So why do we pay for complicated and expensive financial products and strategies if they almost always do worse than simple, transparent ones? Large companies are spending billions of dollars on advertising to convince you that expensive and complicated must be better and more exclusive. Don’t buy the hype. Let’s dispel a few scarily common myths that an entire your-money-as-entertainment industry is trying to convince you of (Think of: every show on CNBC, every E-Trade commercial, new apps for your phone advertising free stock trading).
Here is the hard truth: 90% of professional money managers fail to beat the market over any sustained period. That’s right: those people who have spent their entire careers, and in fact get paid (by you and the investing public), get it wrong 90% of the time over sustained periods. Why would you even try to buy and sell stocks, and “time the market” if experts lose 90% of the time?
We have been trained as a culture to believe that stock trading is a skill, like being an engineer or a doctor. We know by now that it is not a skill. By all means, buy and sell stocks, but do it as a fun game with very small amounts of your money, recognizing that it is for fun. Do not do this with your nest egg. Anyone telling you that you or they can beat the market is selling you false hope, and perpetuating a myth that this is even possible over the long run. For the most part you would be way better off watching the History Channel than CNBC. You will certainly learn more.