It's really hard to beat the stock market

If you've ever wondered whether it's worth paying the big bucks to highly paid active investors and brokers, the answer is: almost certainly not.

It turns out it's really hard to beat the market. For example, over a 15-year period, only 6.5% of US stocks outperformed the S&P Dow Jones Index. Even closer to home, only 5.4% of Canadian stocks beat the S&P/TSX Composite Index over the past 10 years. Even Warren Buffet is advising people to stick with market index funds rather than pay through the nose for active investing advice.

When you consider that mutual funds (the cheapest way to access actively-managed funds) charge an average management expense ratio (MER) of about 1.5%, compared to an MER of about 0.25% on passive index funds, then you can see that it's probably not worthwhile to go the active investing route.

And, increasingly, people are realizing that. Over the past 10 years, US passive funds have increased by about 230%, while active funds have increased by just 30%. Canadian investors have been a fair bit slower on the uptake, with the market share of passive funds increasing from 10.4% to just 15.5% over the last ten years. This compares with a 45% market share in the USA, and 37% worldwide. A smaller change, to be sure, but a change nonetheless.

So, when your next-door neighbour tells you he has found a great broker who can consistently beat the market, or he has discovered an algorithm through Facebook that is going to make him a multi-millionaire, be very suspicious.