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$100 Billion Down the Drain (Every Year!)

Nope. I’m not talking about any bailout-related spending. I’m talking about money that gets wasted every single year, financial crisis or otherwise. According to a study done by Kenneth French, $100 billion is the amount of money that U.S. investors collectively spent in attempts to beat the market in 2006 (the most recent year for which he has complete data).

What a shame. We spent $100 billion in an attempt to outperform ourselves–a goal that is, of course, impossible by definition.

Sure, some of that money was spent paying money managers who did in fact beat the market. But there’s no question that, as a group, we’re worse-off by exactly the total amount we paid.

Most industries “add value.” The financial services industry subtracts it. In other words, most industries provide goods/services that are worth paying for. This industry provides goods/services whose value is negative in precisely the amount that we pay for them.

Two noteworthy (but small) exceptions:

Of course, the financial services industry does in fact provide two services that are of value.

First, there are a handful of good advisers who actually help people focus on things that matter rather than promoting themselves as wonder-workers with some magical way of beating the market consistently. Second, the financial services industry connects users of capital (businesses) with providers of capital (investors).

However, it’s clear that the total amount spent paying for these two services is outmatched by the amount spent on our collective effort to outperform ourselves.

What if we stopped trying?

Just imagine for a minute what life would be like if the investing public were to catch on to the impossible nature of this endeavor.

A few direct results:

  • Actively-managed funds would disappear.
  • Full service brokerage firms would be completely replaced by discount brokerage firms.
  • Financial planners would have to charge reasonable fees, and they’d have to earn their fees by providing real service rather than selling false promises of performance.
  • As a group, we’d be $100 billion richer. Every year.

In addition to the direct results, there would be positive side effects. For example, as people abandoned actively-managed funds in favor of index funds, they’d also benefit from actually understanding what’s in their portfolios.

I know, I know. It’ll never happen. But a guy can dream, can’t he?

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  1. Keep dreaming the dream and fighting the good fight! 🙂 We really don’t need to try and beat the market or try to time it.

  2. Agree, agree…. you should also check out one of Russ Thornton’s recent posts on who the “real” advisers are today and how they really work. Aside from great folks like those (who are a minority), I’d rather be my own advisor, and probably will be until I own more than one property and have more cashflow than I need.

  3. Yes but these $100 billion create thousands of jobs for people, and helped you sell a book on oblivious investing. And by the way very few people agree that index investing is the way to go.
    Thousands of people think that the stock market is a giant casino where you could buy and sell stocks and make double digit percentage gains every month…

  4. DGI: Are jobs for the sake of jobs a good thing?

    That is, if they provide literally no service or product of value, is it really worthwhile?

    It’s like the proverbial “Pay one guy to dig a ditch. Pay the next guy to fill the ditch” way of stimulating the economy. Sure, it may move money around. But it doesn’t actually create anything of value.

    As to “very few people” agreeing that index investing is the way to go:
    a) What do you mean by very few? The percentage of investable assets that are invested via index funds is steadily growing year by year, and
    b) Even if index investing were unpopular, would that mean it’s not a valid (or superior) strategy?

  5. Richard Reyes says

    Way to add credibility DGI. Come to another persons website and plug your own agenda with a link to your website.

    You are a class act.

  6. Stock brokers are a joke. If they knew how to make money in the market,
    they would go out and do just that. The buzz words impress clients,
    but agian if it meant something the broker would use this information to make money directly.

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