Don’t be fooled by claims that active portfolio
management can navigate volatile markets and make you money.
Mutual fund companies and money managers
often say that in normal times it is hard to beat an unmanaged index fund that
simply owns a sector of the market without trying to pick winners and losers.
It is hard to beat those index funds because their
fees are so much lower than that charged by the active managers.
But the managers say that their value may
come in times when the markets are volatile and they can navigate the ups and
downs to save you money or make you money.
The trouble is that these claims are mostly marketing.
I have recently reviewed several portfolios with
actively-managed, high-fee funds and the majority have done worse than low-cost
index funds since the beginning of the year.
A just-completed review of a portfolio with 13 actively-managed funds revealed
that 9 performed worse than an index fund offered in their same category and
only 4 performed better since January 1.
What’s more concerning is that the average underperformance of the 9 was
far greater than the outperformance of the 4 such that the entire portfolio
would have had far superior results since the beginning of the year if it were entirely
invested in low-cost index funds.
The
active managers have the ability to hold less in stocks and more in cash if they
think the market is going to fall giving them the ability to not only try to
pick winning stocks and bonds but also to reduce their exposure to the markets
if they see bad times ahead.
But these
funds, which are managed by several of the largest and most respected mutual
fund companies, failed to navigate the markets in the way they claim they
can.
These 13 funds don’t represent the
entire universe of mutual funds but they do make the point that high-fee,
active management may not be able to provide the magic the big managers claim
they can.
When you buy low-cost index
funds, you can count on getting the returns of your target market sector less
an almost negligible fee and you don’t have to worry that a manager will guess
wrong and cost you money.
A long-term
plan does not include guessing the direction of the market but instead stays
the course and enjoys the growth of assets over the decades.
Don’t be fooled by the marketing claims.
Larry Pike, CFAClient Priority Financial Advisors LLCwww.clientpriority.com
