Meb Faber had a poll on Twitter that asked "how many years do you think you could withstand your portfolio underperforming the S&P 500?"
It's a great question. An important concept that we talk about here frequently is the ergodicity of the stock market. The short meaning there is that over the long term, the stock market is going to work its way higher either with you or without you. As opposed to being hell bent on beating the market, if you build an equity portfolio that generally captures the equity market effect over your time horizon, you have a proper asset allocation and you have an adequate savings rate then odds are very good you will have enough when you need it, presumably for your retirement, or at least be pretty close.
When you get close to retirement, you know what will matter? What will matter is whether you have enough to retire to the lifestyle you want plus maybe having some sort of margin for error in your accumulated savings. "Sure, I'm $200,000 short of my goal but you know what, I beat the market five years in a row from 2009-2013." That outperformance would be meaningless.
A great form of freedom is when you no longer care what other people think. There are very few people whose opinion matters, very few. Once you can genuinely embrace that, it gives you an extra layer of emotional freedom. It's the same with beating the market year to year. It's not something that actually matters. Once you lose the ego involved, realizing that what you need is to just make sure you capture a reasonable amount of the upside, it gives you an extra layer of emotional freedom.
Thus is not argument to just use index funds, although that is valid strategy of course, but more so to build a portfolio that gives you a reasonable shot at financial success, allows you to avoid panic selling when the market does something crazy and I'll add a portfolio that is relatively simple to you.
A little secret is that if you manage your own portfolio (or are an advisor managing client portfolios) for an extended period, there will be some years where you do outperform but there will absolutely be years that you lag and I'd bet most of the time you'd be pretty close to the market either way.
An analogy with baseball, there's a heuristic about major league baseball that no matter what a team does, there will be 60 games that the team wins and 60 games that the team loses. So really, all the work is about how you do in the remaining 42 games. We might be able to apply that logic to investing over a full stock market cycle. As opposed to some random 42 games in a baseball season though, maybe investing comes down to the bear market phase of the stock market cycle. Arguably what you do, like maybe take steps to reduce the extent to which your portfolio follows the market all the way down if you have a strategy to do that, or if you don't, at least not panicking and selling out after a large decline. That's the difference between a great season/successful retirement outcome and a poor result.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time.
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