Being Smart with $$ -- Isn't the Stock Market Risky Enough?

2018 reminds us that some years you make money in stocks but some years you lose it.  In either case, you want to make as much as you can and not lose more than necessary.  Many think that buying the star mutual fund of the last few years gives you a better a chance of making money in up years and losing less in down years.  But often the opposite is true.  When you buy a market-tracking index fund instead of an actively-managed fund, you are sure to almost match market returns every year. When you buy an actively-managed fund, you don’t know what you’ll get.  Maybe you want exposure to Europe and are choosing between Vanguard’s European Stock Index Fund and Janus Henderson’s European Focus Fund.  Three years ago, you may have noticed Janus’s strong performance over the prior 3 years versus the Vanguard fund and paid their 5.75% sales commission to buy this fund. But unfortunately you would have paid the price for learning that past performance often doesn’t carry into the future.  The Janus fund went on to severely underperform the unmanaged, market-tracking Vanguard index fund over the next 3 years.  In fact, the performance was so bad that even including the great years the Janus fund had from 2013 to 2015, the total 6-year performance of the Janus fund was far worse than the Vanguard index fund.  This doesn’t even include the commission paid to buy it.  What is the lesson?  Chasing strong past performers is often a losing strategy and buying low-cost, market-tracking index funds lets you match a market benchmark and in the long run that can work out quite well. Isn’t the stock market risky enough without the added risk that your fund might trail the market itself?

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com