The 14 Truths You Must Know When You Invest

It's the same thing in the stock market. If anyone could beat the market, it should be the largest pension plans in the U.S. These plans invest with people we don't even have access to, and all kinds of great research, regression analysis and so on.

FutureMetrics studied pension plans for 15 years, from 1987 to 2001. Of the 213 plans now in the study, only 19 beat a simple 60% stocks/40% bonds asset allocation. Did some succeed? Yes. About 10% succeeded. That's like Tiger Woods. You have a 90% chance of failing.

There's not a single thing you can do to find the great managers that Goldman Sachs, Merrill Lynch and Frank Russell thought of already. Frank Russell boasts that they can find these great fund managers. They get paid big money to do this. So they got the great idea to create mutual funds. Every year I've run Russell funds against passive-fund managers Dimensional Fund Advisors. Amazingly to me, I would've thought a 50-50 game would happen. I have never once seen this -- they lose and they lose badly.

What's the most inefficient asset class in the world? Emerging markets. Frank Russell's emerging-markets fund lost 7.8% on a pretax basis, DFA lost 1.4%. Russell's Large Value fund lost 3.5%, DFA's gains 3.7%. When you look at it after-tax, the results are even more stark.

As I say in the book, because of taxes, the risk-adjusted odds of beating the market are 38 to 1.

Truth 4: The Media Needs People to Tune In

For people in the financial news media, passive investing is boring, because you have to tell them the same thing every day. Tell them to buy low-cost index funds, then you have to tell them the same thing the next day and the same thing next month.