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When Index Fund Investors Would Have Been Eaten Alive
September 23, 2021

When Index Fund Investors Would Have Been Eaten Alive

Grabbing his spear, the young Neanderthal knew where he could find an easy, yet somewhat dangerous meal. A large grizzly bear recently killed a deer. The bear ate what he wanted and then buried most of the carcass to save for later.

Knowing the bear would remain somewhat near its kill, the Neanderthal crept towards the meat. Several of his friends tried a similar trick earlier that week, dragging a small, mutilated moose back to their cave after a bear temporarily wandered off.  But this young scavenger wasn’t that lucky.  As he pulled on a deer hoof, the bear charged through the bushes and enjoyed a fresh, furless meal.

Three types of Neanderthals lived in nearby caves.  The first were reckless opportunists.  Like our young meat stealer, those dudes didn’t live long. The second were sleepy sorts: always last to run when predators charged.  These lethargic lugs rarely lived long enough to mate.  In contrast, the survivors that prolifically reproduced were those that sniffed the air, alert to danger and opportunity.  They were quick to move with changes in the migration of wild game and race from signs of danger.

We evolved from those survivors.  And their instincts, honed over thousands of years, were stuffed into our DNA.  That’s why we often sell stock market assets after stocks have dropped or when economic fears are high.  We also jump into investments (even highly speculative ones) after we’ve seen them rise.  As our ancestors did, when we see something that’s working, we often jump in.  We’re also quick to protect our cache as a hardwired caution.

For example, we constantly fear the next market crash.  If we inherit money, we often ask, “Is it the right time to buy?” much like our ancestors would have wondered when it was safe to leave their caves. 

These instincts helped our ancestors survive. In fact, the Neanderthals that weren’t aware (or ignored) changing weather patterns, animal migrations and charging bears were the first to be eaten or they starved to death. 

But the world has changed.  To live well, one of the things we need to do is save and invest our money.  And in that pursuit, survival instincts do more harm than good.

In fact, early people who could have passed on the best investment genes were likely gobbled up as kids.  They were the lethargic ones who didn’t move fast or fear predators with claws and teeth.

Today, our instincts compel us to be nimble and react.  We believe buying trading software and following economic news offers the best chance of success. Market-based television is an ever-changing drumbeat that gets our hearts pumping.  We’re bombarded by “news” of a profitable prediction from a man or woman who made a fortune on a past, “brilliant” move.   

But we can beat the performance of most professional investors with a diversified portfolio of low-cost index funds.  The formula is simple: 

  1. Ignore all stock market news.
  2. Ignore all stock market swings.
  3. Ignore every prediction.
  4. Invest money as soon as you have it.  Never try to time the market.
  5. If you’re retired, ignore the value of your account and withdraw an inflation-adjusted 4 percent per year.   

Unfortunately, we fear losing money so much that we speculate, or we hire someone to speculate on our behalf.  We believe hedge fund managers can predict market movements and protect us from losses.  But evidence says they can’t.  In fact, with a portfolio of low-cost index funds, you’ll destroy the returns of most hedge fund managers. 

We believe tactical asset allocation managers can jump from one asset to another as economic tides change. But evidence also says that’s bunk.  

Even Ivy League college boards fall for instinctive hopes.  They hire economists and financial analysts to deftly trade endowment fund money. Once again, led by their DNA, such decisions cause most endowments to lose to a diversified portfolio of index funds. 

And what about the rare winners?  According to SPIVA’s research, active management that wins during one time period typically underperforms the next.  That applies to actively managed mutual funds, college endowments and hedge funds too.  

Ironically, sound investing is tailor-made for sloths:  people who don’t react; people who ignore shifting winds of economic news; people who don’t try to figure out “the best time to invest” or when to take profits off the table.

To invest well, build a diversified portfolio of low-cost index funds and keep adding money.  If you’re retired, withdraw an inflation-adjusted 4 percent per year and ignore all market news and movements. 

But people aren’t wired that way.  Smart investing is simple.  But for evolution’s survivors, it will never be easy.  Our DNA sees to that. 

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This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

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