The Greatest Enemy of a Good Investment Plan

I recently read The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Book Big Profits) and simply LOVED it. Here's one of their thoughts that I especially liked:

The greatest enemy of a good plan is the dream of a perfect plan. Stick to the good plan.

This is one of the issues that I face most often when I talk about using index funds.

Index funds will provide good, solid returns over the course of years -- better returns, in fact, than most other investment alternatives. However, they aren't perfect investments and it is possible to beat their returns. Is it likely someone can beat their returns year after year? No. But it is possible? Yes. And this is what keeps many people away from investing in index funds -- the lure of better returns (which are often very elusive.)

This is exactly what happened to me when I started investing. I had a friend tell me all about index funds and why he invested in them. I thought' "Ha! I'm a smart guy -- I can do better than that!" So I read a ton of books, bought several stock-evaluating publications, researched all I could, then bought a few stocks. And I did very well -- better than the index funds did that year. This simply reinforced my belief that I could do better picking stocks on my own.

The next year was good too. But the year after that was not so good, the next year was bad, and the next was horrendous. When I looked back, if I had stayed with index funds those years instead of trying to do it on my own, I would have made several percentage points more on my investments. It was at that point that my investment habits started to turn towards index funds.

Now you might think that that was just me -- that I wasn't a great stock picker -- and you may be right. You may also think that you can do better -- and you may be right again. But can you do better year after year after year? Are you willing to put in the time, effort, studying and cost required that may or may not result in a high rate of return? Or wouldn't you much rather have a good, solid investment that has much more certainty? I know my answer to that -- and that's why I choose to go with index funds.

For a few more thoughts on investing in index funds, see these links:

• Why Index Funds Deliver Such Great Returns

• Another Expert Endorses Index Funds

• How to Invest Using Only Index Funds

Comments

[SB]

"The greatest enemy of a good plan is the dream of a perfect plan."
- Carl von Clausewitz

A quote that John Bogle likes to use, as do the Bogleheads.

[plonkee]

See, this is why I invest in index funds, not only am I not convinced that I can consistently beat the index with stock picks, I'm also not convinced that I can consistently pick a fund manager who can beat the index. And I love low fees.

[Joey]

Voltaire phrased it more generally as "the best is the enemy of the good".

[invest4life]

Couldn't agree more about index funds. Received some wise advice from a college professor awhile ago about investng in them, followed it, and haven't look back. Fan of your blog, just started one myself targeting college/young investors actually, hope to have it up to your standards eventually. Thanks, and look forward to more enlightening posts from you.

[AJ Cartwood]

Warren Buffet recommends that ordinary investors buy Index Funds. Warren Buffet doesn't invest in Index Funds. Why? Warren couldn't get rich on an 8% average return.