Making Money On Stocks: The One Golden Rule You Must Know

If Warren Buffett, Tony Robbins, and AI have taught us one thing about investment, it’s this.

Becoming successful in the stock market isn’t as difficult as some make it out to be. On the contrary, the most successful strategies for performing well on the market are typically the simplest. Yes, expert investors with years of training perform advanced analyzes to attempt to beat the market. Yet, as we are about to find out, a vast majority of them fail to do so. It turns out that the best way to increase your money over a ten year period is also the safest and the cheapest. Let’s talk about that.

Warren Buffett proved that experts couldn’t beat the index

Back in 2008, Warren Buffett, one of the most successful investors in the world, challenged the hedge fund industry. Buffett claimed that, including fees and expenses, an index fund could outperform a handpicked portfolio over a period of ten years.

An index fund is a collection of stocks constructed to match the index of a financial market. For instance, an index fund will typically follow the 500 or 1000 greatest companies in any market. Since no human curation is required, index funds have incredibly low fees, while providing an extensive market exposure. It’s a cheap way to create a profoundly diversified portfolio of companies that rule the market.

A decade later, Buffett had proven to be correct. The simple index fund defeated all of the experts’ handpicked funds. So much for that expensive expertise.

Tony Robbins discovered that 96% of mutual funds fail to beat the index

Tony Robbins has coached some of the world’s most powerful people and written several best-selling books. One of those books is a 660-page work called Money: Master The Game, in which Robbins interviewed some of the greatest minds in finance. In today’s day and age, a lot of people would rather not read such long books, so let me summarize the book’s most critical elements into a single word: diversify.

Many believe that they can beat the market, yet, there’s one excerpt from the book that I really appreciate (so much so that I have brought it up in plenty of my articles), which turns that whole mindset upside down. “There are 7,707 different mutual funds in the United States […]. But the statistic is worth repeating: 96% will fail to match or beat the market over any extended period.” — Tony Robbins, Money: Master The Game (2016, p. 96, ISBN: 978–1–4711–4861–3).

That’s right: 96% of mutual funds in the US fail to beat the index over an extended period. While this statistic mentions the US in particular, make no mistake, it would be shocking if the failure rate weren’t similar around the world.

Artificial intelligence (AI) also tried to beat the index — equally unsuccessfully

In 2017, a Finnish asset management company called FIM launched the Nordics’ first AI-powered fund. I work a lot with AI, so I’ve naturally followed this fund with great interest. There are countless ways to implement artificial intelligence for investment purposes, so this first attempt was very intriguing for me.

While humans appear unable to beat the index, maybe machine learning would be able to find connections that humans cannot? Well, I’m a firm believer that AI will one day rule financial investments, but it won’t be anytime soon.

FIM’s AI failed to beat the market.

The golden rule: Diversify

Do you see the pattern? Low-cost, hands-off diversification outperforms high-cost, hands-on micromanagement.

Diversification is the most crucial component of reaching your financial goals. The world is unpredictable. It’s complex. A mere tweet by a US president can crash an entire industry. An unforeseen scandal for a manufacturer can affect the stock for other manufacturers, even if they are unrelated. What more — times change. Businesses that were once leaders in their field, such as Netscape or Nokia, have fallen into irrelevance. Any enterprise is merely one startup away from becoming obsolete.

Despite this, some people somehow opt not to diversify their investments. Some become deluded into assuming that the world they face today is the same world that they will face tomorrow.

Diversifying your investments means to protect your money. By spreading your investments out over various industries and nations, you are defending yourself from unanticipated circumstances.

How to diversify

The easiest way to diversify is to put your money in index funds. As we have learned, humans and machines alike routinely fail to beat the index. Index funds have astonishingly low fees and are an automatic method of diversifying. Whether you choose Vanguard, Schwab, or Fidelity doesn’t matter. Once you buy into an index fund, you are automatically investing in the top 500 or top 1000 companies that more or less rule the markets. I invest a large portion of my portfolio into index funds.

Depending on the market you are operating in, you might be able to purchase into funds for free (though selling your shares in them may cost a small fee). This makes it easy and inexpensive to invest in a large number of funds regularly. Some banks/investment platforms even have portfolio generators to help you generate a diversified collection of funds. Spread your money out.

Finally, I must mention DCA. A lot of people wait for the perfect time to invest. They wait, and they wait, and they wait some more. You could try that. Or, you could embrace the fact that no one knows when the perfect time will come, and instead choose a different strategy. Such as dollar-cost averaging (DCA). This is essentially a fancy way of saying: spread your investments out over time. Rather than investing, for instance, $1,200 all at once, you could invest $100 monthly, and you’d be less affected by volatility. The downside of DCA is that if the market were to go up every single month after your first investment, you would have made more money if you invested everything at once. As with everything else, it’s a question of risk versus reward.

I know index funds aren’t exciting. Diversification over tons of industries and nations isn’t as exciting as going all out into a recently listed startup that aims to revolutionize the world through genetic engineering. It’s fun to invest in those kinds of companies. But that should only be a tiny fraction of the money you invest.

Buffett, Robbins, and AI have taught us that the easy and boring way is also the most sustainable way of succeeding in the stock market. Do yourself a favor.


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