The “Big Lie” of Market Indexes

The comments above & below is an edited and abridged synopsis of an article by Lance Roberts

Almost daily there is an article touting the soaring bull market, which is currently hovering near its highest levels in history. But you can’t ever beat an index over an extended period of time.

"Big Lie" of Market Indexes | BullionBuzzCharts show that, in the $100,000 portfolio, investors just got back to even after 16 years of their investment time horizon was lost (inflation accounted for). The problem is the effect of life expectancy on reaching investment goals.

Assuming that an individual was 35 at the peak of dot-com bubble, they are now 51 and no closer to their goals than they were 16 years ago. Assuming they will retire at 65, this leaves little time to reach their retirement targets.

This is proven in survey after survey showing a majority of Americans are behind in their savings for retirement due to one of the most egregious investing myths in the financial world today: that the power of compounding is the most powerful force in investing.

There is a massive difference between average and actual returns on invested capital. The effect of losses, in any given year, destroys the annualized compounding effect of money.

This is why you must compensate for both starting period valuations and variability in returns when making future return assumptions. If you calculate your retirement plan using a 6% compounded growth rate (much less 8% or 10%), you will fall short of your goals.

In order to win the long-term investing game, your portfolio should be built around things that matter most to you: capital preservation; a rate of return sufficient to keep pace with the rate of inflation; and expectations based on realistic objectives (the market does not compound at 8%, 6% or 4%).

Forget about the benchmark index. Focus on matching your portfolio to your personal goals, objectives and timeframes. In the long run, you may not beat the index, but you are likely to achieve your own personal goals.


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