The U.S. stock market is up 27.49% this year.
During this time, the best-performing stocks have included the following companies:
- Sezzle
- Janux Therapeutics
- NuScale Power
How many did you know at the start of the year? How about five minutes ago?
Effective investing doesn’t require you to know these companies.
A total stock market ETF, like Vanguard’s VTI, includes 3,644 companies. When you invest in the entire stock market, you don’t need hot stock tips. You don’t need to spend hours researching different industries.
When you invest in a “passive” fund like VTI, you’re not here for entertainment. Instead, you’re playing to win the game through the smartest route possible.
The Boston Celtics take the same approach. Many sports commentators call them “terrible television.”
But they also won the 2024 NBA Finals.
In their first game this season, the Celtics attempted 61 three-pointers. Only four NBA teams have ever attempted more long-distance shots in a single game.
This looked nothing like a thunderous Shaquille O’Neal dunk over an opponent. Or Michael Jordan hanging dramatically in the air before a reverse layup.
This just wasn’t great entertainment.
Through November, NBA teams have averaged 37.4 three-pointers per game. That pace would set an NBA record, and more than double the league’s average in 2014.
Analyst Prince J. Grimes complained:
“It’s a bad watch. …The games become too homogenous, robbing us of all the intricacies and skill that comes from good post play, a mid-range game, or simply attacking someone at the rim and daring them to stop you.”
Several years ago, San Antonio Spurs coach Gregg Popovich lamented, “There’s no basketball anymore. There’s no beauty in it.”
But if your goal is to win the game, should you care?
A reporter recently asked phenom Victor Wembanyama if he attempts too many threes. The 7-foot-4 center replied, “If I’m open, I’m going to keep shooting them.”
A different measure of the total U.S. stock market, the Russell 3000 Index, includes 2,670 companies.
Even in a strong year for this index, over the past 12 months:
- 40% of all stocks (more than 1,000 companies) have lost value;
- 137 stocks have fallen in value by 50% or more; and
- 25% of all the growth in the stock market comes from a single company (Nvidia).
This doesn’t sound like entertainment to me. There’s no beauty in losing your savings due to misplaced faith in one or two companies.
In basketball, the math is clear: three is greater than two. A shot outside the painted arc offers teams a 50% premium over shots inside.
“The smart way to play,” analyst Nick Wright suggests, “is probably what the Celtics did on opening night. Have [three-pointers] be your entire offense besides dunks and free throws.”
“That’s the best strategy.”
Not every team, though, has players who can shoot from distance. The strategy only works when you’re like the Celtics. When you have eight players who made three-point shots at an above average rate last season.
And when everyone on your team can shoot a three, you don’t depend on a star performer. You don’t need Shaq or Michael Jordan to win the game.
In investing, the math is also clear. Index funds minimize your costs and maximize your exposure to growing companies.
They’re the smart way to invest. Your best strategy.
In this game, though, everyone can do it. You don’t need to be financially savvier than anyone else. And you definitely don’t need a team of investment managers who promise to “outperform” the market.
You can do it yourself.
The NBA might tweak the three-point shot in the years ahead.
The league could push back the arc. Or they could change the shape of the arc, eliminating the corners that create slightly closer shots.
Until then, “I love three-pointers,” Celtics coach Joe Mazzulla says. “I like math.”
You can love the math of index funds, too. As long as you’re just playing to win the game.
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About the author: Kevin Mahoney, CFP®
Hi, I’m Kevin. I’m a financial advisor in Washington, DC. I’m also the founder of Illumint, an independent financial planning company in the District that specializes in financial planning for Millennials like you. I empower our generation with the confidence to invest an inheritance, financial gift, or extra savings. If you’re new to Financially Well, welcome – you now have access to the leading finance podcast for Millennials. I encourage you to read, watch, or listen to the ideas I’ve shared about making your money work for you. And then when you’re ready, please send me your thoughts & questions!
