Growth Fund of America Vs. Vanguard Up & Down Markets

What does the average record each year in the NFL? Remember, there are 32 teams and they each play 16 games.

The average record is 8-8, which is a 500 wining percentage. And that will ALWAYS be the average record.

Yet, in 2017, there were 17 teams with winning records, records above a 500 winning percentage and only 14 teams who were sub-500, with only 1 team going 8-8.

How can that be? Shouldn’t there be the exact amount of teams with winning records and losing? No. Because some teams do far worse than average, in this case the Cleveland Browns went winless.

What does this have to do with investing? The EXACT same thing happens in investing. Some stocks do incredibly well and others not so much, in fact some stocks go bankrupt, never to be heard from again.

However, regardless of what happens to Google or Sears all the investors will return an average each year. And just like the NFL if there are two teams both can not be above average. The records will always level off at 8-8.

In investing if one investor ‘wins’, i.e., beats the average, one must lose. Both investors can not be above average. It’s impossible.

But unlike the NFL, ALL investors CAN win the Super Bowl. How? Because investing is simply owning shares of companies that are increasing earnings and maybe paying dividends.

If I own a company that is growing in value and thus my net worth improves that has no affect on you whatsoever. We can BOTH increase our net worth at the same time regardless if we ‘beat’ the market or not.

Investing is nothing more than owning growing companies. As long as those companies earnings grow, we ALL make out. Notice it has NOTHING at all to do with “beating the market”. It solely has to do with owning companies that grow.

Yet, everyone seems to focus on ‘beating the market’. Why? If you ‘beat the market” inherently I must lose as like I said before we both can’t win.

The irony though is we can both lose! THink about it like this. The market averages 8%. Yet you got 8.15% and I only 7.85%. So, you win….

Oh but hold on there chap! Your investment strategy cost you .50% in fees as did mine. So, NET of fees, which is all that matters, you had 7.65% and I had 7.25% returns. We both underperformed the market average.

When fees are factored investing actually becomes a less than zero sum game because the vast majority of investors dont’ even get the average returns. THey are so focused on ‘beating the market’ the miss the forest for the trees.

If they simply reduced their expenses, diversified among owning many companies, via an index fund, they would have average returns, which would actually outperform the vast majority of investors.

This would be like the average NFL team being docked a win because of high salaries or something and thus the average team, NET OF COSTS, would be 7-9 when the average actual record was 8-8!

And we haven’t even factored taxes in yet either. Throw taxes in because of excess trading and the average investor does even worse.

So remember investing is simple. Own companies that are going to grow. Some will some won’t but on average in a somewhat capitalistic economy you could get decent growth out of these companies.

You making money does not prohibit me from making money either. The only time when we are in competition as investors is when we’re trying to beat the market. Then, one of us has to lose, but in reality, after taxes and fees we both will.

Does active management earn its fees in down markets?

In this episode we analyze the performance of the Growth Fund of America from American Funds vs. Vanguard S&P 500, Vanguard Total Stock and Small Cap Index.

In up years the SP 500 smoked the Growth Fund. But that’s okay right? After all it’s the down market that active funds outperform.

Nope. Not even close.

Similar down market declines. A whole lot less upside in rising markets for active funds.

Should Growth Fund of America be my proxy? Why not? it was HUGE not too long ago. If memory serves GFA was the largest fund in the world at one point a few years ago.

In the huge decline of 2007-2009, GFA was down 50% as was the index funds. But active management is supposed to keep that from happening.

Not this time.

So, if the Growth Fund of America can’t outperform with it’s low expense ratios and low turnover, what’s the likelihood other funds can???

Hard to see that happening.

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