There are several studies in which monkeys or other animals compete against expert investors from the investment industry. For example, the monkeys choose blocks that each represent one share and thus put together their portfolio. Anyone hearing about this study for the first time will probably think that professional investors are much better. After all, many of them have been in high-profile universities, have dealt with the topic for years and are regarded as absolute experts in this area.
However, this is not nearly the case, as the animals regularly beat at least a majority of investors or even all.
What can be concluded from this?
The human being has many mistakes in investing and then chooses his stock on the basis of some particular strategies. If he had no strategy and no idea about investing, then he could randomly pick any stock and would be better off than the “pro”.
Again, to repeat myself, because it is important. An investment professional often invests worse than someone who has no idea and chooses shares purely by chance.
The problem here is that most people have no idea about stocks and therefore prefer to leave investing to the professionals. It invests in an active fund, where a fund manager selects the “best stocks”. From various studies, we know that a person with a certain strategy performs worse. In addition, the fund manager can be paid for his “good work” quite well. It is also not uncommon for an actively managed fund to incur fees of between 1-3% or even more. That’s why active funds are much worse off than randomly selected shares, if the fees are considered.
What is the alternative for investors?
The solution is passively managed index funds (ETFs – Exchanged Traded Funds). This form maps an index (such as the NYSE, DAX, or others) and nobody manages it, since the stocks are given by the index. Here, the costs are almost always below 0.5% and sometimes even much lower. So, the most important thing is to make sure that the costs are low. With the same return, 1% higher costs are very high. Thus, a return of 5% after 40 years means a sevenfold increase, while at 6% the money has increased tenfold.
I think that makes it clear why care should be taken while choosing your investments and always pay attention to the fee structure.
Investing is not as difficult as many think, and you do not need to have studied economics. There are only a few things to consider and you are a better investor than 90% of the people.
In my other articles I will shed light on what should be considered when investing. Share your experiences in the comment box below including investments that you could recommend to other frugalists to become successful investors.