My stepmother owns about 2,000 shares of Coca Cola stock (KO) worth about $85,000. Her cost basis on those shares is about $1,000. She is currently getting about $2,200 in cash dividends from her Coke stock each year.
You might want to call her an investment genius. How did she do so well? All she did is inherit the stock and proceed to throw her statements in the trash (without reading them) for 30 plus years, and barely listen to her blue chip investment advisors when they came to visit her once a year. She didn't do this because she thought she was smarter than them. She just didn't care.
In short she did less than nothing. Just think if she had been a "smart" investor. She would have followed Coke stock quarterly earnings, listened to analysts saying that Coke will miss earnings, Coke is blowing it with "new coke." And also listened to those same analysts and market pundits say a year later that Coke is doing great, Coke is back, etc. She might have traded in and out of Coke, bought puts and calls, etc. Just like a real institutional investor.
And just like a real institutional investor, her returns would have been pathetic. She would have churned her account and drastically underperformed her default buy and hold Coke strategy.
Ok, she did get lucky. If her stock had been Kodak instead of Coke, the results would have been tragic. But there is a lesson here.
Most investors trade too much. Most investors get caught up in the market noise and gain comfort in following the herd. They buy tech stocks at the top, sell out of the market in March of 2009, and buy gold when every huckster on cable TV says it is the greatest investment of all time (instead of when it was dirt cheap in 2000). In short, they do just about everything wrong you could possibly imagine. They panic at the bottom and get greedy at the top. They are aided in their investment debacles by breathless, excited talking heads on TV and thoughtful wise gurus in the press encouraging them to do something. Act! Don't miss the high! or low!
Not everyone can get lucky with Coke stock. So what can you do? If you substitute Coke for a broadly diversified ETF like the Vanguard Total World Stock Market Index ETF (VT), you can apply the same strategy as my stepmother without the risks implied in owning a single stock. In fact, you can diversify away the risks of not just a single stock, but also the risks of being invested in a single country.
If you buy VT and throw away your statements for the next 30 years, my opinion is that you will beat most "active" investors and just about every "brilliant" institutional investor out there. Should VT be your only equity holding? I think it can be, as part of a portfolio that also includes low cost bond index funds, while also applying intelligent asset allocation that factors in your risk profile and age.
Of course, there are risks in any strategy. You are putting your trust in Vanguard's capitalization-weighted indexing methodology versus other forms of indexing, as well as their skill in rebalancing a global portfolio. And you are accepting that spreading your equity assets across the globe in all equity markets is superior to concentrating your assets in particular countries.
Am I simplifying things? Yes. Does that mean I'm wrong? That is up to you to decide.
Additional disclosure: Baldwin Partners Group, LLC is a state registered investment advisor. Alex Bentley is the CEO, Founder and an investment advisor representative of Baldwin Partners Group, LLC.