You Don't Need To Invest In Hedge Funds To Have Investing Success

This chart shows the return of a simple portfolio that holds 60% in a simple S&P 500 index fund and 40% in a global bond index fund vs. the returns of the hedge fund industry over the last 10 years.

What this tells you is that it is hard to beat the market. Hedge funds hire some of the sharpest minds on Wall Street and charge a fee of 2% per year plus 20% of the return they make. If they can't beat the market, what makes you think that you can, or your broker, or the neighbor who tells you he is making money hand over foot?

The lesson for most investors is to hold stocks that look very much like that of the overall stock market (the S&P 500 or a Total Market index fund will do) + a portion of bonds that look like the overall bond market. Hold these in a proportion that is right for your risk tolerance, minimize taxes (holding a stock index does this very efficiently), keep fees low (index funds do this better than any other funds) and you will have a high probability of outperforming the average investor over time.

Gatsby and Investor Behavior

"Gatsby believed in the green light, the orgiastic future that year by year recedes before us. It eluded us then, but that's no matter - tomorrow we will run faster, stretch out our arms farther.... And one fine morning-- So we beat on, boats against the current, borne back ceaselessly into the past."

The above quote from the final page of F. Scott Fitzgerald's The Great Gatsby is a beautifully written description of the American psyche. It can also be read as an insight to investor behavior as it relates to the stock market. That is because we believe in the endless possibilities that the market can bring to us. Our dream is the hope that a person can choose the right investment and get rich. This hope has been ingrained in our American DNA through literature, movies and television. 

Wall St can be the place of fortunes and when its not, it can destroy financial lives if we take risks we dont understand or cannot afford. Yet we keep going back and we continue to believe that if we pick the right stock, mutual fund or adviser we can achieve the elusive - consistent market beating returns that will result in easy financial wealth.

We believe in the dream and ignore the academic research that says: over time, an investor has a very low probability of beating the market; and that holding a portfolio of simple index funds, that represent the overall market, outperforms almost all other strategies. Yet "we beat on, boats against the current"  trying to beat the market. Unfortunately, there are really no shortcuts. That is the tragedy of Gatsby. He tried to achieve his dream through shortcuts. It cost him his life. 

There are no shortcuts when it comes to investing success. Occasionally, some get lucky and get rich on a small investment. Those are the rare exception. The secret to successful investing is a disciplined commitment to saving, managing our get rich quick emotions by holding a risk appropriate, well diversified portfolio of various asset classes, rebalancing, and keeping costs low through the use of index funds.