Picking Stocks Randomly Beats the Market

. July 1, 2014
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Is it a good thing to put your money "in the market?" That depends on what you mean. Most people will steer you toward cap-weighted funds (the S&P 500, for example, is a cap-weighted index). Research suggests that of all the ways to balance stocks in a portfolio, cap-weighting is one of the worst.

Article in plain English: Index Monkeys Beat Cap-Weighting 

Researchers have found that equity indices constructed randomly by 'monkeys' would produce higher risk-adjusted returns than an equivalent market capitalisation-weighted index over the last 40 years.

White paper: Equal-Weighted Benchmarking: Raising the Monkey Bars 
Given the disappointing performance of active managers, it is particularly surprising how many alternatively weighted indices outperformed the cap-weighted S&P 500.... A more comprehensive critique conducted by the Cass Business School showed that “...equity indices constructed randomly by 'monkeys' would have produced higher risk-adjusted returns than an equivalent market capitalization-weighted index over the last 40 years. A study based on monthly U.S. share data from 1968 to 2011 found nearly all 10 million indices weighted by chance delivered vastly superior returns.” This counterintuitive and remarkable result deserves specific emphasis. According to these results, in the period from 1969 to 2011, if you had picked stocks at random, there is a 99.9% chance you would have beaten the market.