I have been rereading "The Little Book of Common Sense Investing" by John Bogle. Bogle is the founder and former chairman of Vanguard. The book was really eye-opening for me in regards to the working of the financial industry.
In a nutshell, it's very, very hard to outperform an index fund - which is, in effect, buying the whole stock market. Any gains made from active money management are usually wiped out by taxes and fees. Therefore, for someone who is not a full-time investor, it's smart just to stick your money in an index fund and forget about it.
Tim Ferriss over at his blog just found out the same thing. In this post, he managed to ask Warren Buffet what a young investor with a full-time job should do. Buffet's response: “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work."
Here's another great quote, this one from Jack Meyer, who used to manage Harvard's endowment: "The investment business is a giant scam."
This is a situation where economic incentives work against people finding out the truth about investing. No one is going to pay for (or charge for) the advice, "put your money in an index fund." I mean, I just said it right there and I won't expect any checks in the mail. Instead, you have people trying to sell this system or that system, buying and selling stocks, perhaps creating more excitement but ultimately producing lower returns.
It's bizarre that the investment sector is so huge, yet it's really not adding anything of value. Businesses and capital generate profits. The stock market simply allows investors to gain a share of this increase in wealth. The middlemen try to extract money for themselves at the expense of the individual investor. If you invest in an index fund, you get to directly tap the source of the increasing wealth, bypassing the middlemen and increasing your returns.
