by Karen Telleen-Lawton, Noozhawk Columnist (read the original in Noozhawk by clicking here)

My first exposure to investing was a high school economics class in 1973. We each chipped in a couple of dollars to buy $50 worth of one stock selected by majority vote. That year being the first great oil shock, we chose Great Basins Petroleum, which nevertheless lost a great deal of its value by the time we sold it at the end of the school year.

This experience came to mind when I read an online article by Thomas Pound in Seeking Alpha. A licensed stockbroker, Pound taught high school classes in investing. He led them through basic fundamental stock screening to help them limit their choices to financially sound companies with the potential to increase those profits over time.

Pound grew curious about how the selection efforts of his students correlated with how well their stocks performed. He found that, for the almost 200 students he eventually taught, “the classes where they fully invested their portfolios saw their stock positions outperform the market.” Further, he says, “all of the classes where at least 85 percent of the students actively participated in the project outperformed the market index.”

As an active investing aficionado, Pound drew two conclusions for individual investors from his data:

» 1. If one is willing to be fully engaged and active in their stock selections, then it is possible to outperform the market.

» 2. If one simply has a passive interest in investing, and merely does so to save for retirement or another goal, then passive indexing is just the thing to do.

I can’t disagree with these conclusions, but they aren’t very helpful. The insights leave out most investors, who I believe fall somewhere between his two conclusions. Most people don’t think they have the time or inclination to be fully engaged and active, but this situation frustrates them because they believe that they ought to be able to “beat the market.”

My own high school experience may be a factor in why I became a financial advisor. I find that even —– or especially — for people who want to talk about beating the market, a more holistic and ultimately successful financial approach begins with living within your means, nurturing a savings habit, and discerning your goals and risk tolerance before moving on to investing.

When careful spenders accumulate enough savings to invest the surplus, the vast majority will find that they are better served by passive investing. Statistically speaking, most active traders underperform the market even before considering the management fee. After the management fee, nearly all investors would have been better off in the long run purchasing a diverse portfolio of low-cost, passively managed Exchange Traded Funds (ETFs). Passive investing isn’t a fallback strategy but a smart way to protect and grow your investment portfolio.

Still, many people want to participate in companies they believe in, whether because they know the management or like the products or concept. For those who want to pick individual stocks (myself included), it’s good to keep only a small percentage of your portfolio in a small number of companies. If you win, you earn the pleasure of boosting your favorite charities, gifting kids or grandkids, extra traveling or whatever. If you lose, you haven’t lost so much that you’re dependent on those kids in your old age.

Karen Telleen-Lawton, Noozhawk Columnist

Karen Telleen-Lawton is an eco-writer, sharing information and insights about economics and ecology, finances and the environment. Having recently retired from financial planning and advising, she spends more time exploring the outdoors — and reading and writing about it. The opinions expressed are her own.More by Karen Telleen-Lawton, Noozhawk Columnist