I want to anticipate and address one obvious objection to yesterday's post: if personal investing is so easy, why do so many experts make it seem so complicated?
This question almost answers itself. Imagine you're trying to start a personal finance magazine. If every issue gave the same advice—"put your money into a Vanguard lifecycle fund and leave it there until retirement"—it would be a pretty boring magazine.
What makes an interesting magazine is headlines like (to pick some current examples at random) Best Long And Short Investment Ideas For 2012, "Bad News For 2012: Average P/E Likely Below 10, Big Drop In Stock Prices", and 6 Consumer Picks Growing on Our Weakness. There's no particular reason to think following the advice in these articles will produce higher returns than picking stocks with a dart board. Indeed, thanks to trading fees, buying individual stocks using either method is likely to produce lower returns (and higher volatility) than buying a Vanguard mutual fund. But personal finance magazines aren't in the business of giving good investment advice; they're in the business of selling ads. And hot stock tips produce more pageviews than earnest lectures about mutual fund expense ratios.
Exactly the same point applies to Wall Street itself. There's a ton of money to be made in charging people high fees to try to beat the market. There's very little money to be made in charging people low fees to deliver market-average performance. The evidence suggests that the average investor gets higher returns from the low-cost, "passive" strategy. But lots of people have a vested interest in keeping investors in the dark about that fact.
If every investor understood the principles of sound investing (e.g. buy and hold low-cost, "passive" mutual funds), huge numbers of fund managers, stock analysts, CNBC reporters, financial columnists, and the like would be out of their jobs. A good mutual fund doesn't take many people to run, and people who put all their money in mutual funds don't tend to buy magazines or watch TV shows featuring the latest hot stock tips. So the livelihoods of a huge number of people on Wall Street and the financial press—the very people whose job it is to advise people about their investment choices—depends on perpetuating investor ignorance.
