Newsflash: If a financial advisor or fund manager brags to you about “beating the market”, it’s NOT what you want to be hearing right now! In this episode, I debunk the popular myth that you should be trying to “beat the market” when times are good. I also lay out the questions you must ask instead when evaluating a mutual fund or investment manager. Don’t get caught chasing high-beta strategies after one of the longest bull markets in history has already unfolded. Investing and trading are contests of endurance, not of raw speed.
Section 1: Today’s Market in Historical Context
- There are bull markets, bear markets, and range-bound markets
- Long-term chart of the S&P 500
Section 2: The Unpleasant Truth: How Mutual Funds and Managers Beat their Benchmarks
- Cherry-picking returns
- Sketchy math
- “Marking the close” – see Resources section below
- High-beta stocks
- Illiquid portfolios
- Lack of diversification
- Asymmetric risk profiles
- Very few: superior management
- Focus on how they did during the more challenging years in the market
- Size of fund: rapid growth can limit future opportunities
Section 3: The Questions to Ask Instead
- Show me a longer track record of returns – if not available, ask why
- Who is the management team, and has it changed recently?
- Is the fund always “fully invested?” If not, how far are they willing to go into cash?
- Does the fund use leverage?
- What’s the expense ratio, inclusive of all costs?
- How does the fund typically distribute capital gains? A little each year, or all at once? For more details on the tax consequences of trading and investing, check out my series of podcasts entitled: The Wise Investor’s Guide to US Income Taxes.
- Are you prepared to handle a large number of redemption requests? How many?
Section 4: The Real Way to Beat the Market Over the Long-Term
- Active management
- Keep drawdowns as small and infrequent as possible by practicing good risk management
- A plan personalized for you:
- Track and monitor your “total cost”, keep it as small as you can while implementing the strategies you want
- Commissions & fees
- Fund expenses
- Bid/ask spread
- Index tracking error
- Margin interest
Intro music and mid-program music by audionautix.com