Home Finance Time to Take a Pledge: No Stocks if You’re a Member of Congress

Time to Take a Pledge: No Stocks if You’re a Member of Congress

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The evidence is everywhere, and someone ought to spend 15 minutes shoving it under the nose of every member of Congress who shows up in Washington for the first time. Where to start?

Extremely active investors, as Ms. Loeffler and Mr. Perdue were, might begin with the classic 2000 paper “Trading Is Hazardous to Your Wealth,” which used the records of over 66,000 households to show that the annual returns of people who traded the most were 6.5 percentage points lower than the overall market.

Next, they could move on to what a different set of academics believed was the first-ever analysis of the actual portfolios of members of Congress between 2004 and 2008. It turned out they weren’t great at this investing thing and would have done better in basic index funds. If they had invested $100 that way, they would have ended that harrowing period with $80. Instead, the average member who felt above average ended up with $69.

Stocks bounce around a lot. Past performance is no indication of future success. If you don’t believe it, check out the Stock Pickers chart on the site of a firm called Index Fund Advisors. It re-ranks the performance of 18 household-name stocks over each of 20 years, before your very eyes.

To take this thought further, consider a bit of analysis from Dimensional Fund Advisors: If you examine the entire top 10 percent of stocks each year since 1994, fewer than a fifth, on average, make the top 10 the next year. “Investors with concentrated portfolios may actually miss out on the very stocks that deliver the best of what the market has to offer,” the firm notes.

In fact, according to a different bit of research, the best-performing 4 percent of stocks contributed the stock market’s entire net gain since 1926. Buy index funds, the logic of which is apparent in several research notes on Vanguard’s website, and you’ll get every security that makes up whatever the 4 percent might be for the next 100 years.

So why do so many individuals use other strategies instead? One reason could be ignorance. Or hubris born of the past decade, when stocks have mostly gone up. Also, plenty of people like gambling. And now that companies like Robinhood have lowered the transaction costs of active trading, it’s just so tempting to press one’s luck, especially when you’re bored during a pandemic.

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