One of the biggest lies sold to investors is that they should either pick specific stocks themselves or invest their money with someone who will cherry-pick the best stocks for them. True, this strategy can create some big wins – but studies are increasingly showing that over the long term, most actively managed funds fail to beat their benchmarks by a significant margin. The S&P Indices Versus Active Funds scorecard shows that only 34 percent of large-cap funds outperformed the S&P 500 in 2016. Over five years, this drops to less than 12 percent. Even if a manager beats the market one year, that’s no guarantee that they’ll continue beating it, and long streaks are very rare. Further to this, the Financial Times reports that 99 percent of US active funds and 97 percent of emerging market active funds have failed to perform better than the market since 2006. Yet, these are the individuals and businesses that many investors are entrusting their money to.
Stop Trying to Outguess the Market
When someone picks out a specific stock, what they are really saying is that they believe they know something the market doesn’t. It’s tempting to believe this is possible – who doesn’t want to have insight that no one else does? However, the market contains the collective knowledge of millions of people, who together have access to the same information sources. It’s not impossible to consistently pick good stocks – just ask Warren Buffett – but it is rarer than we think; even Warren Buffett has made mistakes. Instead of chasing wins and trying to outguess the market, investors should focus on taking advantage of the information and buy across the whole market.
Is Your Active Fund Really a High-Fee Tracker?
It’s bad enough that investments aren’t performing, but are investors even getting what they’ve paid for? Some active funds offer a similar exposure to the market as passive funds yet are charging higher rates for active management. In this scenario, not only do investors not get what they have paid for, but they’re losing out to a similar passive fund because of the high fees they are paying. Instead of paying the 0.1 percent a year for a passive fund, they’re losing one percent or more for no benefit.
First Steps to a Better Investment Strategy
To pursue a better investment strategy, investors must first recognize that most advisors don’t give advice that is in the long-term interest of their clients. Despite their poor performance, fund managers continue to attract new investors because they do not understand who or what they are investing in. Managers attract new customers by encouraging brokers, or glorified salespeople, with the prospect of commission. Investors must engage the services of a Fiduciary Advisor, who is legally obliged to give them the best possible advice and to look out for their interests above their own. Unfortunately, this definition only covers about 10 percent of advisors. Fund managers, for example, aren’t Fiduciary Advisors – they ask people to invest in their fund even if it is performing badly because that’s how they make money.
The investment market is riddled with poor advice that causes most investors to blunder, which probably costs our economy billions each year. The only way an investor can protect themselves is with a Fiduciary Advisor who has to give them the best advice. At Labrum Wealth Management we are proud to offer Fiduciary advice while providing you with the best service possible so you can pursue better.