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Investors who try to beat the benchmark end up doing far worse
I recently received an email from a reader I’ll call Andrew. He’s 25 and has been using the Couch Potato strategy for two years now. He’s happy with the results, but starting to feel restless.
“A few of my coworkers have introduced me to day trading,” he wrote. “They focus on volatile ETFs that hold gold miners, as well as oil and gas companies. These funds swing up and down all day, and my coworkers claim that with some research they’re able to make big returns. This leaves me feeling like I’m missing out on significant returns for taking a little more risk.”
Andrew is experiencing what’s come to be known as fear of missing out, or FOMO, a pervasive feeling that other people are enjoying something we’re not. We all have a little FOMO from time to time, like when we’re invited to a party we can’t attend, or when friends talk about their upcoming vacation to Maui just after we put a few thousand bucks in our RRSP. For index investors, a major FOMO trigger can be tales of outsized returns from people who actively trade stocks.
I feel for Andrew. I can just hear the chatter around his office: one colleague bought ABC at the opening bell and then flipped it for a 12% profit when its earnings announcement was better than expected (he anticipated this, of course, because of his shrewd research). Another sold XYZ for a tidy profit just before it lost a patent case (a brilliant call) and its stock went into the toilet. High-fives all around for that one. Meanwhile, poor Andrew can only shrug and say that he rebalances his index fund portfolio once a year on his birthday. Yawn.
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