How to Beat 80% of Investors With 1% of the Effort

How to Beat 80% of Investors With 1% of the Effort

A little while back I went to my friend’s bachelor party in Montreal. As we were sitting together late night at the blackjack table, happily giving our money away to the dealer, the subject of making responsible financial decisions came up and he mentioned that he has a guy who manages his investments for him.

Now, I usually try not to be a know-it-all when this stuff comes up with my friends because, well, that’s pretty annoying. But he brought it up and this is a topic that hits home for me, so…

I asked why he pays this guy to invest for him. And he essentially gave me three reasons:

  1. My friend doesn’t have the time or knowledge to do it himself.
  2. It’s this guy’s job, so he knows how to do it right.
  3. It’s fair to pay someone for a service if they can do it better than you can.

All good points. All completely logical. And in just about any other situation that would be a perfect answer. End of discussion.

But investing works differently.

You don’t need to pay someone to manage your investments for you. In fact, you may be MUCH better off doing it on your own, and it doesn’t have to be hard or take a lot of time.

Here’s how to beat 80% of investors with 1% of the effort.

The failure of active investors

Before getting into the how, let’s quickly talk about the why.

In 2013, Rick Ferri, CFA and Alex Benke, CFP® released the results of a study where they compared the performance of actively managed investment portfolios to those of index-based portfolios.

The actively managed approach relies on the skill and expertise of investment professionals to generate superior returns. The index-based approach relies on mutual funds and ETFs that simply track the market.

What they found was pretty incredible.

Despite all of their training, all of their knowledge, and all of the time spent trying to find the best opportunities, the investment professionals repeatedly failed to beat a simple index-based investment strategy.

For example, when Ferri and Benke evaluated a simple three fund portfolio made up of US stocks, international stocks, and US bonds, they found that the index-based portfolio outperformed the actively managed portfolio 82.9% of the time.

Not only that, but the professionals typically underperformed by 1.25% per year. And the small number of professionals who managed to outperform the market only did so by 0.52% per year.

In other words, not only were there far fewer winners than losers, but the losers lost by much more than the winners won by.

Now, you could argue that a three fund portfolio is too simple and therefore not a fair comparison. After all, most investment professionals create more complicated portfolios in an effort to capture extra returns and limit the downside risk.

Luckily, Ferri and Benke looked at that scenario too.

What they found was that the more complicated you made the portfolio, the more likely it was that the index-based strategy would win. For example, when they looked at a 10-fund portfolio that included a wide range of asset classes, the index-based portfolio produced better returns 89.9% of the time.

And by the way, these were not isolated findings. Study after study has demonstrated the superiority of index funds over actively managed funds.

The big breakthrough here was the realization that combining index funds in a portfolio increases that advantage even further.

That finding has some pretty powerful implications for you as you create your own personal investment plan.

How to dominate your investments with minimal effort

So now we know this: simple, index-based investment strategies outperform professionally managed investment strategies 80-90% of the time.

But what does that mean for you?

After all, that knowledge alone isn’t enough. You still need to create, implement, and manage an investment strategy that utilizes that information in the right ways to help you reach your investment goals.

And that still sounds like a lot, right? Isn’t that where the professional help comes in? Isn’t the point of paying someone so that you don’t have to spend all the time and energy learning and managing this yourself? So that you can do it the right way with minimal effort?

A few years ago I probably would have said yes. And there are still situations in which getting professional guidance can be incredibly helpful.

But you should also know that it’s easier than ever to create, implement, and manage an index-based investment plan on your own that not only increases your odds of getting good returns, but requires minimal ongoing effort on your part.

Here are a few ways to do it.

1. All-in-one funds

Most investment companies now offer all-in-one funds that are essentially an entire investment portfolio in a single fund.

For example, Vanguard offers its LifeStrategy Growth Fund that looks like this:

  • 48% Vanguard Total US Stock Market Index Fund
  • 32% Vanguard Total International Stock Index Fund
  • 14% Vanguard Total Bond Market Index Fund
  • 6% Vanguard Total International Bond Index Fund

With a single fund, you get access to the entire world of stocks and bonds. You never have to worry about rebalancing, since the fund does that for you. And the total cost is only 0.15% per year.

This is as easy as it gets. Literally all you have to do is find a fund that approximates your target asset allocation, set up automatic contributions to that fund, and you’re done! You’ve created an index-based investment strategy that requires almost no ongoing work and, according to the research, has an 80-90% chance of outperforming the professionals.

You can find more Vanguard all-in-one funds here and here, and plenty of other companies offer them as well.

The big “but” here is to watch out for costs. Some of these all-in-one funds are more expensive than others, and since cost is the single best predictor of future returns, this is something you’ll want to pay attention to.

2. Robo-advisors

Robo-advisors are automated investment platforms that perform essentially the same role as a good all-in-one fund. They create and manage the investment portfolio for you, meaning all you really have to do is set up your contributions and let the platform do the rest.

On the plus side, the good ones make it easy to get started, give you access to a top-notch index-based investment portfolio, and cost much less than an investment professional.

On the down side, they cost a little more than using one of the best all-in-one funds.

You can read more about the pros and cons here, but the big takeaway is that the good ones are really good. Honestly, a platform like Betterment gives you access to essentially the same type of portfolio that most good investment managers have been using for years at a fraction of the cost.

3. DIY

Of course, you don’t have to rely on someone else to do it for you. If you have a specific strategy you’d like to implement, and if there’s no all-in-one fund or robo-advisor that does it, you can pick your own funds and manage it yourself.

This obviously requires more work than the options above, but it doesn’t have to be much more. And anyways, the only reason to go this route is if you have a strong conviction about a particular investment philosophy, which means you probably nerd out on this stuff and are okay with a little extra work!

And the good news is that going the DIY route is easier than ever. There are more low-cost index funds available than ever before, with plenty of easy and free ways to access them.

For example, you can trade Vanguard funds for free if you invest with Vanguard, and the same is true with Fidelity, Schwab, and many of the other major fund companies. And if you’d rather mix and match, many trading platforms offer a strong lineup of commission-free ETFs so you can choose the best from each investment company.

The bottom line is that once you choose your funds, which will require some up-front work, it’s simply a matter of opening the accounts, automating your savings, and rebalancing once per year or so.

Honestly, after that initial work, it doesn’t have to take you more than 15-30 minutes PER YEAR to manage. And you can save yourself a heck of a lot of money.

Quick note: Do you want real answers to your personal questions about investing and other financial issues? Click here to learn how to get them.

How much money will you save?

You might read all of this and think to yourself: “You know what? I get all of that, but 1% isn’t very much to pay someone to just do this for me, and at least that way I’ll have the peace of mind of having a professional in my corner.”

Fair enough. So let’s look at just how much that 1% could be costing you.

I created this simple spreadsheet to run the numbers, and you can grab your own copy to run them yourself if you’d like.

Here’s what I assumed:

  • You’re starting with $50,000.
  • You’re adding $11,000 per year (the max combined IRA contribution for a married couple).
  • You get a 7% annual return.
  • In one scenario, you choose Vanguard’s all-in-one fund that costs 0.15% per year.
  • In the other scenario, you use a professional who charges you an additional 1% management fee.

In this example, after 20 years that extra 1% fee will cost you $77,708. After 30 years it will be $254,122. After 40 years it will be $695,232.

That’s a lot of money! And if you’re starting with more money and/or contributing more each year, the difference will be even higher.

The point here is that even a small fee can cost you a lot of money. Are you willing to pay hundreds of thousands of dollars to someone without really knowing what they’re doing for you?

Don’t waste your money

There ARE good reasons to get the help of an investment professional. More than anything else, a good one will help you create a plan tailored to your specific goals and stay on track when the going gets tough.

But you shouldn’t blindly assume that it’s worth paying someone 1% or more of your money every single year just to manage a portfolio for you. The tools available to you these days are too good, especially when the potential cost of ignoring them is so high.

Unless your “investment guy” is doing substantially more than choosing some funds and rebalancing every now and then, it’s not worth wasting your money.

Start building a better financial future with the resource I wish I had when I was starting my family. It’s free!

22 Comments... Read them below or add one of your own
  • wayne creel August 7, 2016

    thank you very much

  • matti August 13, 2016

    Thanks. Hope you are right !

  • Kate September 13, 2016

    Great blog post. Spot on advice!

  • Mrs. Picky Pincher September 29, 2016

    I haven’t started investing quite yet, but it’s good to get a handle on it beforehand.

    Sometimes getting out of debt can be a better investment than actual investing, though, since you’re getting rid of negative net worth and interest. In my opinion, it only makes sense to invest once you’re debt-free.

    • Matt Becker September 30, 2016

      That’s a great point. Paying off high interest debt (higher than 6% or so) makes a lot of sense as a first step, since it represents a guaranteed return on par with what you can expect from investing, which is far from guaranteed. When the interest rate is lower I would say figuring out what to prioritize depends a lot more on your specific circumstances and goals, but in any case paying off debt is always a great investment.

  • Steven Goodwin September 29, 2016

    this is great advice! As long as you are good to weather the storm and not jump out of the boat when things are going down. If you can stomach the ride without trying to pull your money out then this is definitely the way to go! Well explained and great post!

  • Kurt October 2, 2016

    Excellent piece Matt, thanks for writing. My mind continues to be boggled by the millions of people who persist in entrusting their savings to overpaid active managers. I attribute it to the high-powered Wall Street marketing machine + lack of time/interest on the part of small investors to self-educate just a little bit on investing. I will do my part for today by sharing your article! 🙂

    • Matt Becker October 2, 2016

      Thanks Kurt! The trend is moving in the right direction but there’s definitely still work to do.

  • Dividend Growth Investor October 3, 2016

    Actually, your title and article are misleading.

    This is because your research does not prove that people who have invested in index funds have done better than people who have invested in something else.

    Index funds are nothing magical that will cure you from bad investing habits. If you are a terrible investor, and make bad decisions such as timing the markets, chasing the best performing sectors/funds, you will not do well.

    If you pick the wrong index fund, you can and will do worse than most others. For example, those who had a high allocation to international funds over the past decade, have done much worse than people who bought the average actively managed funds that focused on US stocks.

    If a person invests in index funds, but pays a hefty annual sum to their financial adviser, they will underperform for sure.

    The real reason those active funds do worse on average is due to higher costs and high turnover.

    To summarize – your article is deceitful, since you do not know what those index investors will buy, whether they will stay the course, and you also do not know how much they are paying to their expensive financial adviser.

    Best Regards,

    Dividend Growth Investor

    • Matt Becker October 3, 2016

      You’re right. Index funds are not a cure-all. Bad behavior will lead to poor returns no matter what you’re investing in. And not all index funds are good. The high-cost ones are just as harmful as many of the actively managed funds (which is why, in this article, I explicitly warn people multiple times to look out for costs).

      So I agree with you on those points, but I disagree with the rest of your comment. Let’s look at it this way…

      Vegetables are healthier than twinkies. I don’t think anyone would argue otherwise. So does that mean that eating vegetables will automatically make you healthy? Of course not. You still need to exercise, sleep well, etc. Sitting on the couch all day eating spinach is better than sitting on the couch all day eating twinkies, but it’s far from ideal.

      Does that mean we should stop telling people about the benefits of eating vegetables? Does that mean that it’s misleading to explain why eating vegetables is more likely to lead to good health than eating twinkies? That sounds kind of silly, doesn’t it. While it’s not the only component of a healthy lifestyle, you make things much easier on yourself and increase your odds of success when your veggie intake is higher than your twinkie intake.

      When it comes to investing, the data is clear. Index funds outperfom active funds 80-90% of the time. That doesn’t mean that using index funds will automatically lead to great returns since, as you say, there’s more to the equation. But it does mean that using index funds significantly increases your odds of success.

      So, what else goes into a good investment plan? Asset allocation is one thing, like you mention, and people can learn more about that here. Discipline is another, and people can learn more about that here. And of course, simply saving enough money is more important than everything else combined, and people can learn more about that here.

      This article is all about constructing and managing an investment portfolio and whether you need to pay a professional to do it for you. And while I agree with your points about there being more to investing than portfolio construction, I stand behind both the title and the content of this article 100%.

      Thanks for taking the time to leave your opinion!

      • Dividend Growth Investor October 3, 2016


        I agree with you on the importance of having a plan, sticking to it, having discipline, and keeping costs low (taxes, investment ones etc). We can also continue this discussion through email, as I do not want to hijack your site. ( I don’t know your email though)

        I disagree with you on the 80% claim. That being said, I am not saying that buying index funds is bad. Nor am I saying that you do not know what you are doing. Perhaps I used the word deceitful too much, but I related it to the article, and I was not trying to imply that you are trying to deceit people.

        I am just questioning your claim that you know how to beat 80% of investors, since this claim is not supported by actual data. That is because the data doesn’t exist. Hence the claim shouldn’t be made.

        The disagreement stems from the fact that in a very narrowly defined asset/asset class view, an index fund can do better than other funds, mostly due to its lower cost. For example, if we both bought at the same price 30 year US Treasury bonds to hold maturity, but myself and 4 other friends of mine pay 1%/year to my broker, and you pay nothing other than a $10 fee to execute the trade, you will come out ahead on Treasury Bonds (you are in top 20%, the rest are in bottom 80%).

        Perhaps you are mistakenly using this 80% from this narrowly defined view, and project it over a portfolio of several funds selected by you/the investor. This is an incorrect way to view it.

        If we hold more than one asset class, you do not know if you will come out ahead of me or not. It all depends on what assets you select, and your weighting of those assets. Plus, we do not know what behavior cost or financial adviser cost we may experience as well. For example, if the other four investors put half of their money in equities fund charging 1% while you own no stocks, and equities continue to do better than bonds over time, you may end up much worse than those 4 investors overall ( despite the fact that you are at in the top 20% of bond investors).

        This is why I stated that the opinions you have presented are not accurate, if not outright deceitful. It is because it offers a false sense of precision, which is not really there as it is not supported by data .

        I will agree with you when you provide actual data, which shows how 80% of real money index investor portfolios have outperformed non-index portfolios.

        If you cannot provide this data, or this study, you cannot make the claims you are making.

        Either way, I enjoyed this discussion. Talk to you later!

        • Matt Becker October 3, 2016

          The link to the study is in the post. I would encourage you to re-read the post from the beginning, check out the study I mention (and describe in its own section, along with other studies that are also linked to), and let me know if you have any more thoughts.

          • Dividend Growth Investor October 3, 2016

            Unfortunately, the study didn’t look at actual investor returns.

            It compared index fund portfolios to randomized simulated trials of active mutual funds.

            If you can please refer me to a study with actual portfolios, not what could have been done, that would be helpful.

          • Matt Becker October 3, 2016

            I would love to see a study of real investors as well. I can also see why that would be difficult to pull off and full of complicating factors that would cloud the results (like, what exactly is the definition of an “index investor”?), but if done well it would be great to see.

            The big thing that such a study would tell us, as far as I can tell, is whether “index investors” are better behaved than other investors, keeping things like risk tolerance, time horizon, and investment goals relatively constant. That would certainly be interesting, and again I agree with you that individual investor behavior is important no matter what you choose to invest in. (Side note: this study is better than most in that it analyzed ACTUAL mutual funds available to individual investors, rather than theoretical indexes many other studies use. So to the extent you want to look at actual results, this is closer than most.)

            But I don’t think any of that invalidates the point of this post, which is that constructing your portfolio with low-cost index funds significantly increases your odds of success, and that doing so is easier today than it has ever been. You don’t need to pay a lot of money to access a high-quality, highly-diversified, well-researched investment strategy. You can get all of that for dirt cheap and doing so puts you well ahead of someone who is not doing so.

            Again, eating veggies is better for you than eating twinkies. It doesn’t mean that’s the only thing you should do. But it does mean that everything else you do will be even more effective if you have veggies as your foundation.

  • Xyz from Financial Path. October 3, 2016

    This really resonates with me and it is the exact message I try to share with my writing. I admire Vanguard for their low-fee offerings and the education of the general public is primordial to a prosperous society.

  • Ramesh April 24, 2017

    My retirement fund is 100% in index funds. I am 35, so I have decided on the following asset allocation:

    Domestic and International stocks: 90%
    Domestic and international bonds : 10%

    BUT I am waiting on the sidelines at :

    Domestic and International stocks: 40%
    Domestic and international bonds : 60%

    I think the stock markets are overvalued and as Fed pulls out money from the markets and interest rates raise along with the events in Europe, there will be plenty of opportunities to enter the stock markets.

    Am I doing it wrong by timing?

    • Matt Becker April 25, 2017

      Well, I definitely understand why you feel the way you do, but the research says that there’s essentially no way to market time effectively. There just hasn’t been any evidence that even the experts can do it effectively. With that said, you could consider two things:

      1. Choosing a less aggressive overall asset allocation to account for the fact that you’re nervous about losing money in the near future.

      2. Dollar cost averaging the money you have on the sidelines into your desired long-term asset allocation over time. Doing so would at least somewhat reduce the risk that an immediate market downturn would affect all of your investments.

  • Robert August 29, 2017

    I’ve tried to explain how fees affect returns to people more times than I can count. Very few get it so I’ve started to work backwards. I tell them, when they retire, they can withdraw 4% of their savings every year until they die without running out of money. (I realize that is oversimplified, but I don’t want to lose them.) So if they have $100,000, they can spend $4,000 minus $200 for fees if they are paying 0.2% ($3800) or $3000 if they are paying 1% or $2000 if they are paying 2%. I’ll give them an example with $1,000,000 ($38,000, $30,000 or $20,000), if I think it will help it sink in without them saying, “I’ll never have $1 million so why worry.” It seems to be a little more tangible. Am I correct? I see reference to the 4% rule (or ___%) constantly, but nobody subtracts the fees when they talk about it. I’ve even asked a financial planner friend who recommends 3.75% and charges 1% AUM. I have vetted him and he knows what he is doing and is trustworthy (if anybody wants to comment on those two things, please don’t go down that tanget). The question seemed to make him pause and think about it as though he had never considered it or had seen it talked about before.

  • Lyle Wroe April 8, 2018

    Hi Matt, I was just wondering about your opinion on using Infinite Banking, Bank on Yourself, or Be Your Own Banker type (Structured Whole Life Policy) of strategy for investing rather then the traditional Stock Market/IRA Type Savings? My reasons are: Guaranteed tax free and tax deferred growth, Safe, We can borrow 90% with no loss of growth if paid back, Lawsuit/creditor proof,no penalty for early withdrawal, gains are locked in, guaranteed future value,value passes income tax free, no market risk, self completing at disability/death, and we leave our survivors something as a bonus. I’m 55, my wife 51. Contributing $30,000 per year for 10 years will result in $13,143 per year income for life without touching the $300,000 contributed, AND A DEATH BENEFIT OF $1,667,047.00. It then drops in year 11 to $994,429.00. But that is still $694,429 that will go to our children. Can any of your plans do that? Are stocks not gambling? We lost $36,000 in “Very Conservative” stocks in 2000. We will not gamble that away. When you say a stock fund earns 7%, but then you pay taxes on those earnings and fee’s, you might earn, I repeat, might earn 3% and does that even keep up with inflation? And, heaven forbid, you have something serious happen and need to borrow the money? Oh, and then the tax man taxeth, I mean cometh and taketh away. Thank you and have a very blessed day. PS, do you think that we will be taxed less or more in the coming years with SSI depleting, health costs going up, a national debt in excess of $165 Trillion, and a government with an open checkbook to dig us deeper? Somebody is going to pay…

    • Matt Becker April 9, 2018

      Lyle, there are a number of factual errors here but the bottom line is that whole life insurance – and the entire infinite banking concept – is a bad idea for just about everyone. I’ve detailed all the reasons why here: Why Whole Life Insurance Is a Bad Investment.

Leave a Comment