Why the S&P 500 is the Best (And Worst) Thing to Ever Happen to Investors

Tyler Gardner (0:00)

Your brain did not evolve to invest. It evolved to keep you alive in a forest when a rustle in the bushes might be a snake, or a predator, or worse, your neighbor Todd telling you about a new stock. Which is to say, you're wired to react quickly, not think patiently.

Hello friends, this is Tyler Gardner welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be.

Quick note before we get into it, June's pre-order incentive for my book Real Wealth is the most personal thing I've ever agreed to share. Pre-order in June and submit your receipt at tylergardner.com, and you'll get an exclusive three-episode audio series that will never appear on this feed. Three pivotal moments in my own financial life. The humbling one, the embarrassing one, and the one that made me rethink everything. Three episodes, three moments, tylergardner.com, pre-order, submit your receipt, get the episodes delivered digitally in early July, and receive every additional monthly incentive between now and the book's release on December 1st. And now, introducing today's episode, what I am lovingly referring to as the tyranny of the benchmark.

For reasons I can no longer fully explain, though at the time they felt highly rational and quite urgent, I once spent a summer attempting to build a spreadsheet that could outsmart the entire US stock market. This was no small project. It involved dozens of tabs, thousands of data points, and at least one regrettable subscription to something called Alpha Wolf Trading Insights, which I will not be discussing further for legal and personal dignity reasons. But I had read the books. I had studied the charts. I had taught myself just enough statistics to be dangerous and just enough behavioral finance to develop a mildly superior attitude toward other people's investing mistakes. I had, in short, done everything right except the one thing that actually mattered, which was to stop what I was doing. And still, after all of that effort, after all of that self-belief, even after Alpha Wolf, my portfolio performed more or less exactly like a target date index retirement fund only with more fees, way more anxiety, and considerably more self-delusion, which is when I began to suspect, with some reluctance, that perhaps I was not going to beat the stock market with consistency as Peter Lynch had told me that I might be able to. And if you're being honest with yourself right now, you probably won't either. This is not an indictment of your intelligence. It is not a comment on your work ethic or your innate ability to see patterns and candlestick charts that resemble extinct sea creatures. It is just an observation of reality, backed by mountains of evidence and delivered with genuine warmth and a gentle reminder that trying to outwit the market is like trying to outswim the tide. You can flail and splash and fight it all you want, but in the end, you're still getting pulled in the same direction as everyone else. Only now, you're exhausted and missing a sandal or two. Today, we're not just going to talk about why you won't beat the market, but we're going to talk about the very concept of beating the market and why it is one of the most expensive ideas in the history of personal finance, and why this is the part I really want you to hear.

Matching the market is not mediocrity. It is a triumph. It is the smartest, calmest, most emotionally resilient thing you can do with your money over a lifetime. But first, I need to tell you about the worst thing that ever happened to the individual investor, which was also simultaneously the best thing.

In 1975, a man named Jack Bogle had what was in retrospect, one of the most genuinely revolutionary ideas in the history of finance. He launched the first index fund available to individual investors, a fund that didn't try to pick winners or beat the market, but simply owned the entire market at the lowest possible cost, and then it would let time do the rest. Now, if you listened to the podcast from a few weeks back, we know this was a profoundly simple idea, but we also know that it was mocked immediately. As I referenced, Fidelity's Edward Johnson called it un-American. Competitors called it Bogle's folly. One investment manager described it as a sure path to mediocrity. The financial press couldn't quite believe that anyone would seriously suggest that the right answer was to just own everything and stop trying. And as we know now, looking back, or at least some of us know, Bogle was and continues to be right. Consistently, historically right. The data on this has been accumulating for over 50 years, and it points in one direction with the kind of unambiguous clarity that is genuinely rare in any field of human inquiry. So that was the best thing. And I know it's familiar. It might even feel repetitive to you. But I want to add some nuance, because in my mind, it was also the worst thing. Because the moment Bogle created an index fund to track the S&P 500, he accidentally, inadvertently, created a benchmark, a scoreboard, a standard against which every other investment, every other strategy, every other portfolio in America would henceforth be measured, whether that comparison was fair, relevant, or even coherent.