Exchange-Traded Funds Coming to a 401(k) Near You

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Here is something that is as true as it gets: There is really no reliable way to beat the market. More often than not, those who try end up failing and underperform the benchmarks against which they are racing.

Outside of plain incompetence, there are two main reasons why. Writing to the then-publisher of the Washington Post, Kay Graham, in 1975, Berkshire Hathaway Chairman and CEO Warren Buffett explained the first: “A little thought, of course, would convince anyone that the composite area of professionally managed money can’t perform above average. Estimates are now that about 70% of stock market trading is accounted for by professionally managed money. Any thought that 70% of the environment is going to substantially out-perform the total environment is analogous to the fellow sitting down with his friends at the poker table and announcing: ‘Well, fellows, if we all play carefully tonight, we all should be able to win a little.’”

Since the financial industry has done nothing but gorge itself on American wealth over the past 40 years, it is likely that Buffett’s words are more true today than they were back then. As the financial sector increased in complexity, the financial services industry grew to accommodate it, and the average investor doesn’t have to look very far to find a fund manager advertising market-beating returns.

But beating the market is not impossible — just hard — and people like Buffett prove that it’s possible, even over a long timeline. Buffett’s conglomerate holding company reports a compounded annual gain of 19.7 percent since 1965, more than double the 9.4 compounded annual gain of the S&P 500, including dividends.

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