This Is The Most Dangerous Chart In The Retail Investment Business

It is wildly difficult to beat the stock market in any given year.

Most fund managers who try to beat the market fail. And most of the time, it's before fees are considered, which means the money investors take home is far less.

Even Warren Buffett knows he can't beat the market forever.

Still, you can't separate feelings of greed when it comes to investing. And as a result, your brain will tempt you into trying to beat the market. Indeed, "overconfidence" is one of the first things you learn in Behavioral Finance 101.

It certainly doesn't help when you see investors and fund managers beating the market.

That brings us to the most dangerous chart in the retail investment business. It comes from Goldman Sachs' Amanda Sneider in the firm's Mutual Fundamentals report, which was published last Tuesday.

Sneider's report included an analysis of 219 large-cap core mutual funds with a combined $612 billion in assets under management. These do not include passively-managed S&P 500 index funds.

"42% of funds outperformed the S&P 500 in 2013, above the ten- year average of 36%," wrote Sneider. "The median fund underperformed the S&P 500 by 62 bp."

Anyone with a basic understanding of statistics can read this and conclude that you're just better off going with the passively-managed index fund, which has a long history of beating more than half of the investors in the market. This is what Jack Bogle's entire life's work is all about.

Unfortunately, retail investors will look at backward-looking charts like the one below and obsess over the blue bars to the left of the dotted line.

Similarly themed charts are found in fund marketing materials that boast about years of outperformance.

"The biggest problem appears to be that - despite all the disclaimers - retail flows assume that past performance is a good guide to future outcomes," said market guru Gerard Minack.