“Once you remove yourself from Wall Street’s complete and total obsession with trying to beat the stock market average, and accept the fact that equaling the stock market average is a rather sophisticated approach to the whole thing, building a successful common stock portfolio becomes an immensely gratifying experience.”

That’s the Coffeehouse credo, and a simple one at that. Don’t expect Wall Street to embrace it anytime soon, though. Of all the investing myths that the financial industry holds dear, this one tops the list – that your investment success is dependent on owning market-beating stocks and mutual funds. Is it?

If you are intent on building a successful portfolio for the long haul, is it worth your time and money to go looking for a mutual fund manager or stockbroker that will beat the stock market average with your investment dollars? Wall Street would like you to think so, and is relentless in its efforts to make this myth stick inside the collective psyche of the investing public. Coffeehouse Investors think otherwise. Let’s see what this debate is all about.

The first Coffeehouse principle is simple — Diversify! Don’t put all your eggs in one basket. Two years ago Wall Street wasn’t talking diversification. It was talking dot com mania, IPOs, and new economy portfolios. Amid the growth stock meltdown, Wall Street is finally chattering about the importance of diversification. Welcome to the Coffeehouse, Wall Street.

The second Coffeehouse principle is as simple as the first — capture the entire return of each basket, easily achieved through a portfolio of low cost, tax efficient index funds.

This is where Wall Street and the Coffeehouse part ways. The financial industry is quick to move past the topic of diversification with you, and begins to discuss the importance of searching out the few golden eggs in each basket in an effort to beat the basket’s benchmark average.

Wake up, Wall Street. You can’t have it both ways. The markets are too efficient for that. You can’t own a diversified portfolio and pursue market beating returns at the same time. It is not going to happen.

If you want to own a diversified common stock portfolio, it virtually eliminates any possibility of securing long term returns substantially above a benchmark average.

However, if you want to latch on to the myth, and pursue meaningful returns above a benchmark average, there is one easy way to accomplish this — build an undiverisified portfolio of stocks and mutual funds — and cross your fingers.

Unfortunately, many investors have painfully discovered that it takes more than finger-crossing when pursuing Wall Street’s favorite myth for more than two years, or however long the next hot industry sector lasts.

Let’s see what this myth is all about.

Logically, you would think that most mutual fund managers who spend all day researching stocks, talking to company presidents, and analyzing balance sheets, could eventually pick enough good companies and avoid enough bad companies, and end up beating the stock market average, which consists of all the good companies and all the not-so-good companies combined.

This is what Wall Street wants you to believe – That you CAN beat the stock market average by relying on Wall Street’s stock-picking expertise. Not surprisingly, many investors buy into it. Hope springs eternal.

For Coffeehouse Investors, this isn’t the issue, because Wall Street is right – it IS possible to beat the stock market average. The 30 percent of actively managed mutual funds that have topped the Wilshire 5000 index the past fifteen years are proof enough that it can happen.

For Coffeehouse Investors, the question isn’t even, “What are my CHANCES of beating the stock market average?” — even though your chances are significantly less than 30 percent, especially in taxable accounts.

Here’s something to consider when the lure of Wall Street’s favorite myth comes calling. Using Morningstar’s Principia program, I discovered that the top performing mutual funds outperformed the market by a combined average of 1.2 percentage points annually over this fifteen year period.

Maybe the essential question we should be asking ourselves, is, “Is it worth trying to capture one extra percentage point return above a benchmark, when in reality I am likely to end up with half that amount as a result of my efforts?”

Unfortunately, that’s been the investment pattern of most investors the past fifteen years, as they’ve switched from fund to fund at an alarmingly high rate, capturing only a fraction of the market’s return in the process.

Putting this in the context of today’s investment decisions, if a diversified account of passively managed stock index funds generates a 10 percent return over the next fifteen years, will your efforts to beat the market, and capture an 11 percent return in the process, leave you with a 5 percent return instead?

Whether you own a diversified portfolio of individual common stocks, actively managed mutual funds, or passively managed index funds, a buy and hold philosophy increases your chances of approximating the stock market averages. Wall Street has shown us that actively pursuing returns above a benchmark is a myth, and a mistake we are sure to regret.

(Editor’s Note: Bill Schultheis is the publisher of The Coffeehouse Investor, a financial and investment newsletter. He may be reached at (206) 286-0376 or WjS6@aol.com.).