What I learned from the Bogleheads: Investing principles by DIY investors for DIY investors
When I started learning about investing in 2012, I thought that professionals had a ton of knowledge that allowed them to invest better than others.
I thought I had no choice but to trust either a professional fund manager or a financial advisor to make my savings work and prepare for my pension.
But as I was doing research, I came across the Bogleheads. The Bogleheads are a community of everyday people who are learning to take control of their finances and invest better. They have developed an investing philosophy that serves the investor first, as opposed to what the financial industry, which serves its own interests first.
What differentiates them from the rest is that the Bogleheads rely on evidence and academic research to invest using a simple approach: index investing. That’s the investing philosophy we follow at FIRE Belgium.
The main things I learned from the Bogleheads are that:
- Predicting the stock market reliably is nearly impossible
- Most professional fund managers get worse performance than a simple index fund
- You don’t need to be a stock market specialist and know everything to invest well
- You can invest on your own via index funds and get better performance than banks and professionals.
And in this article, I’d like to share with you the evidence.
The evidence banks don’t want you to know: Active vs Index Investing in Belgium
For our analysis, we’ve looked at several sources and reports:
- S&P Dow Jones Indices: SPIVA Scorecard
- Morningstar: Active vs Passive Barometer
- DALBAR: Quantitative Analysis of Investor Behavior
- JP Morgan: Guide to the Markets
If you prefer, I shared this information in the FIRE Belgium Show on YouTube:
You can also listen to it as a podcast on Spotify, Apple Podcasts and YouTube Music.
1. S&P Dow Jones Indices: SPIVA Scorecard
The SPIVA Scorecard compares the performance of investment funds with their benchmarks (the indices) and shows that the vast majority of funds underperform their benchmark. And the underperformance gets worse over longer investing periods. For meaningful investing periods of more than 10 years, over 90% of funds underperform their benchmarks.
2. Morningstar’s European Active/Passive Barometer
The Morningstar’s European Active vs Passive Barometer shows that over 1-year periods, only about 30% of actively managed funds outperform an equivalent portfolio of index funds. Over periods of 20 years (a normal investment horizon for most people), only 10% of them outperform. 90% of actively managed funds are closed or underperform.
3. DALBAR’s Quantitative Analysis of Investor Behaviour
Based on 30 years of data, the Dalbar study shows that investors underperform the market by more than 2% per year on average. Compounding over time, this leads to tens or hundreds of thousands of lost performance for many investors. This is due to excessive fees and speculative behaviour.
4. JP Morgan’s Guide to the Markets
Based on 75 years of data, JP Morgan shows that
- the returns from the stock market vary a lot over a single year (between -37% in the worst year, up to +52% in the best year)
- the volatility decreases significantly for balanced portfolios (60% stocks and 40% bonds in this case)
- There are no periods of 10 or 20 years where investment returns where negative on average over that period.
Over 20 year rolling periods, the returns of a balanced portfolio varied between 5 and 15% per year on average, with an average annual return of 9.4%.
This shows the benefits of diversification (including bonds) and of investing for the long term.
Conclusion: what we learn from the evidence
Here is a summary of the lessons we can learn from the evidence presented above:
- 90% of actively managed funds sold by banks and financial advisers underperform a simple equivalent index fund portfolio over periods of 10 to 20 years.
- On average, active investors underperform the markets by about 2% average annual return.
- Investing over a longer time period reduces the range of expected returns.
- Diversification reduces volatility.
How to get better performance than most banks and professionals
So how should you invest to get better performance than most banks and professionals?
- Open a low-cost safe and regulated online broker
- Invest in a low-cost balanced portfolio of index ETFs
- Combine a global stock index ETF with a high quality bond index ETF for reduced volatility.
- Buy-and-hold, invest over time and hold for the long term.
- Automate and stick to your personal investment plan.
To know more about how to get started:
- Watch the free workshop: firebelgium.com/investingworkshop
- Download the Beginner’s Guide to Index Investing
- Subscribe to the FIRE Belgium Show: YouTube, Spotify, Apple Podcasts, YouTube Music.
