Every day on the business channels, commentators argue with each other over whether a certain stock or the overall market is cheap or expensive. These are professionals who each manage hundreds of millions or billions of dollars of assets. But if they disagree with each other, who are we to trust when making investment decisions? Many people who don’t understand investments believe that the pros have a secret sauce that lets them pick the good assets and sell the bad ones and get in and out of the market at the right times. But when the pros are regularly disagreeing with each and doing the opposite of their adversary on the news, it shows that none of them really know. And when the SPIVA Scorecard (a research report that studies fund performance) reveals that the vast majority of actively-managed funds do worse than an unmanaged fund in the same category over a decade or more, it should be quite obvious that the pros know very little about which asset will outperform or when the market will go up or down. It’s not that they are phonies without substantial knowledge of the markets; it is that the markets are so efficient and reflect all known information that it is extremely hard to add value to a simple buy-and-hold portfolio. The pros do worse than unmanaged, market-tracking index funds because they take a large fee out of their investments every year and don’t add enough value to offset the fee. Of course, a small percentage outperform their benchmark over the long run but good luck predicting in advance which one will do so. Many celebrity fund managers have gone from hero to zero after failing to keep outperforming. The one way to give yourself a very high chance of outperforming the vast majority of mutual funds is to own the unmanaged ones, with very low internal costs, in the percentage allocation suitable for your individual needs. An adviser can help you with this allocation but don’t let that adviser convince you to pay high additional fees for promises of outperformance they are unlikely to deliver. Always ask a prospective adviser if they are likely to put you in commission-based investments, or if they will take 1% of your assets each year, or if they will primarily put you in mutual funds with internal fees of 0.5% or higher. If the answer is yes to any of these questions, you may want to keep looking. (Past performance may not be an indicator of what to expect in the future and your individual circumstances should be considered in any investment decision.)
Larry Pike, CFA
Client Priority Financial Advisors LLC
Hourly,
Fee-Only Financial Planning and Advice.
No Commissions. No automatic, annual fees.
