If Fund Managers Can’t Beat the Markets, How Can You?

Screen Shot 2013-01-14 at 2.14.04 PMBack in October, 2012 we published an article 80%-90% Of Financial Planners Don’t Even Beat the S&P 500, So Are They Worth Their Fee?

Interestingly this past week, Barry Riholtz referenced Merrill Lynch research that showed only 39% of fund managers beat the S&P500 last year.

Barry went on to write:

This morning, the WSJ references Goldman Sachs research — it shows something similar. Their data showed 65% of U.S. large-cap stock funds trailed the benchmark index net of fees. (5 year average = 66%).

When they looked for funds that beat the index two consecutive years, they came up with an astounding number: A mere 10% of nearly 2000 U.S. stock funds beat their benchmark in both 2011 and 2012 (Source: Morningstar research).

This is why most people are better off putting money into inexpensive passive index funds.

If you want to at last have a fighting chance to pick a fund that actually has a shot to beat its benchmark, these 2 steps are a start:

1. Low Fees — look for funds with an expense ratio of 0.86% or below.

2. Avoid Closet Indexers — find funds with a low R-squared ratio.

The full article explains these in great detail. 

How to Find a Fund Manager Who Can Beat the Market

I still think that for many people, especially those with portfolios under $250k, passive indexing is simpler, less expensive, and more reliable.

investing-in-bonds.s600x600We did further research and found a MarketWatch article that offered similar perspective, “Are Financial Advisors Worth Their Fee.” Quoted in the article:

“An investor who pays a financial adviser to pick mutual funds either misses the point of planning or has a bad adviser. In fact, Blanchett said that the thing that surprised him the most about the research was the value of annual meetings, where clients and advisers tweak strategies, particularly as the consumers is entering or in retirement; both advisors and clients tend to focus on market results more than the benefits they get from having that sit-down.”

How can you beat the S&P 500?  We’re a believer that astute investments in the global market are a better way to beat the S&P 500. What makes it hard for old school money managers at large investment firms to beat the S&P 500 is that in-depth analysis of promising global stocks is often lacking, even at the major Wall Street firms.  The majority of global stocks that interest us do not show up on the lists of researched stocks at many large investment houses.  Most huge investment firms do not provide much coverage of small and micro cap stocks.  It’s only after some of these stocks appreciate 50-100% that big firms finally start to initiate coverage. And, even then, the analysis is sometimes still lacking depth or meaningful analysis.

It can be time consuming, but it’s certainly not too difficult to do your own research.  Those who follow Stocks On Wall Street know that we’re a believer in the long-term growth of Asian and other select emerging market economies.  In addition to the usual economic indicators, we’ve also honed our perspective to include an analysis of how the political and legislative environments will potentially affect the growth prospects of companies and countries.

Granted, taking charge of your own investments, especially in global and emerging markets, is not for the fainthearted.  Don’t fool yourself about the risks.  But, remember, the risk is not just on the down side. We, for one, remain a believer in the long-term economic global growth story relative to the U.S. economy and our almost insurmountable debt.  That doesn’t mean we would shun U.S. investments.  It simply means we will continue to skew our investment perspective toward global and emerging markets, which we believe will deliver greater returns over the long haul.

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