Sure You Can Beat the Market!
All right, I'll admit it -- this is a classic case of bait and switch. I put the "sexy" title up to draw your attention. The reality is that in all likelihood you can NOT beat the market. Why is that? Two simple reasons. First, if you decide you want to chase the hottest stock or mutual fund, you're going to have to deal with transaction expenses. On average, an equity mutual fund charges from 1.3 - 1.5% per year for all expenses. Versus a MUCH lower 0.2-0.3% for certain index funds (https://institutional.vanguard.com/iam/pdf/IAMERPDF.pdf). So....right off the bat, you're down over a percent in your quest. Second, there's the issue of "beating the market". The academicians have studied this one a number of times (http://www.ifa.com/Media/Images/PDF%20files/Does_Asset_Allocation_Explain_Performance.pdf). The conclusions are clear -- 90% of a mutual funds return is dictated by the asset allocation that it follows. Now there is hope in that only 40% of the variation amongst funds in the same class are determined by similarities in allocation; however, the same study shows that 100% of the total return is driven by asset allocation. Got that? 100% and you're paying an extra 1% for the privilege of being average!
Unfortunately the press and ads like to prey on our desire to be "better than average". Fact is you can be better than the average mutual fund by pursuing a simple asset allocation strategy with low cost mutual funds.
