Why I Love My (Boring) Index Funds

The Seductive Allure (and Frequent Failure) of Stock Picking

In his book, "The Simple Path to Wealth," JL Collins talks about this seductive allure – and frequent failure – of stock picking in a chapter aptly titled, "Why I Can't Pick Winning Stocks (And You Can't Either)." Collins, a seasoned investor himself, admits to falling for the same trap. He recounts stories of his own stock-picking endeavors, highlighting how even with access to expert analysts and insider knowledge, accurately predicting stock performance remained frustratingly elusive.

He paints a vivid picture of the corporate forecasting process, exposing the inherent difficulty of predicting the future:

• Salespeople are required to forecast what their customers will spend.
• Since these buys are rarely locked in far in advance, and can be cancelled any time, nothing is truly certain.
• Add to this all the pending business that may or may not come to fruition and basically you are asking the field salesperson to predict the future.
• Typically they are not clairvoyant.
• So, of course, they take a guess.

Reading this was a wake-up call for me. It made me realize that I was trying to outsmart not just professional analysts who lived and breathed this stuff, but also the executives who run the very companies I was investing in. I was relying on a few books and annual reports to give me an edge over people with far more resources, knowledge, and experience. The hubris was staggering.

The Simple Truth About Index Funds

Then I discovered the simple truth about index funds. Index funds, instead of trying to pick winners, simply buy all the stocks in a given index. It's like owning a slice of the entire market.

Collins explains why this is so powerful:

Because VTSAX is an index fund, we don’t even have to worry about which companies will succeed and which will fail. As we’ve seen, it is ‘self-cleansing.’ The failures fall away and the winners can grow endlessly.

Think about that: your portfolio automatically adjusts as companies rise and fall. No more second-guessing, no more sleepless nights worrying if you picked the wrong stock.

Embracing the Boring

Now, I know index funds might seem boring compared to the high-stakes world of stock picking. But trust me, boring is beautiful when it comes to building wealth. It means less stress, less effort, and, ironically, better returns for most investors.

The research consistently shows that index funds outperform actively managed funds over time. Collins cites a Vanguard study which found that:

Only 18% managed to both survive and outperform the index.

That's right, 82% failed to beat the unmanaged index. And 100% of them charged their clients high fees to try.