So you think you can beat the market? You watch business television all day and sign up for expert newsletters. You stay ahead of the “game” in understanding what’s next in technology, and you chat in online forums exchanging ideas with others “in the know.”
How well are you doing so far? Since the start of the year, the S&P 500 is up about 14%, as we near the end of September. It was primarily led by a few big tech stocks (Apple, Microsoft, Amazon, Alphabet/Google, Meta/Facebook), so you could have easily beat the average numbers by owning just those tech stocks.
This is the time to evaluate your performance this year. Check online, or the third quarter statement for your brokerage account or 401(k) will be arriving in the mail any day. Did you “beat” the market with the portion of your funds designed to do that? What did you pay for that advice, and is your performance net of all fees?
Not the pros
Even the pros have a tough time beating the market. The new SPIVA report from S&P Dow Jones Indices, details the performance of professional money managers vs the averages. It revealed, once again, that it’s tough to beat the market — even when you’re getting paid a good salary to do so.
This latest report covers only the first six months of the year, when the S&P 500 Index gained 16.9%. (As of this writing the S&P 500 is up about 14% year-to-date.) The index has had a significant rebound from its decline of 18.1% in 2022.
Yet 60% of all active large-cap U.S. equity managers underperformed the S&P 500! Darts, anyone? And the longer-term picture for active managers is even more dismal.
According to the report, a majority of large-cap managers outperformed in only three of the last 23 years! You’d have better odds of winning in Las Vegas, than of finding the few large cap (large company) fund managers that beat the stock market on a consistent basis.
Some think it is easier to pick winners among smaller companies. And the SPIVA results demonstrate that: 52% of mid-cap managers beat the benchmark S&P MidCap 400, while 72% of small-cap managers outperformed the S&P SmallCap 600 so far this year.
But that performance is relative. Overall, for the first six months of the year, the S&P MidCap 400 increased 8.8% and the S&P SmallCap 600 returned 6.0% — far less than the large cap index.
Lessons for investors
If stock-picking is your hobby, or your business, go ahead and enjoy the thrills. I’m not here to dissuade you because you provide liquidity for the market! But if you are simply trying to make sensible decisions about your long-term retirement funds, there are some lessons here:
Working Lunch
—Don’t try to beat the market. If you just manage to “be” the market, over the long run, you’ll do just fine. The historic long-term average return of the S&P 500 index with dividends reinvested is 10%. Of course, that includes many years of double digit returns and some scary years of negative returns as well.
—Stick with the plan. The odds of beating the market are far against you if you jump in and out based on headlines and emotions. A simple plan of regular investing is likely to bring you out ahead in the long run. In the past 100 years, there has never been a 20-year period when you would have lost money in a diversified portfolio of large company stocks with dividends reinvested — even adjusted for inflation.
—Costs matter. In bull market years, the cost of advice and management is buried in the gains. But in years when the market drops, even a 1% management fee can make a more evident impact on your returns. The cost of the Fidelity 500 Stock Index fund is just 15 basis points (0.15%) all in. Paying more can add up over the years.
It’s certainly worthwhile to get unbiased fiduciary advice about how to allocate your investment funds — large company, small cap — or perhaps, as you get older, more “chicken money” in T-bills or Treasury-only money market funds.
The big financial firms that advertise their expertise in “beating the markets” are paying for those commercials with the money you’re paying for their advice! Think twice about the cost/benefit to your retirement plans. You can do this yourself without paying a fortune. And that’s The Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)
©2023 Terry Savage. Distributed by Tribune Content Agency, LLC.