Investment Facts

Capture What Markets Have to Offer

There is a model of investing based not on speculation but on the science of capital markets. Decades of research guide the way. There is a way to deliver the performance of capital markets and increase returns through state-of-the-art portfolio design and trading. Research and rigorous testing by financial economists led to the development of models to evaluate the risk/return characteristics of securities and portfolios, and also led to efficient market theory that demonstrates risk and return are related. Many studies from the 70's on document  the failure of active managers to outperform market indexes giving rise  to passively managed index funds that rely on capital markets as the source of investment returns.

To learn more about the specifics of risk adjusted portfolios that are the cornerstone to rational and efficient investing, please visit our resources area of the web site, and click on the individuals learning link.

Discover the truth about investing.

Fact #1:  Average investors don't beat the major indices. 

Why? People chase performance; emotionally selling on the way down and buying on the way up. 

Average stock investor and average bond investor performances were used from a DALBAR study, Quantitative Analysis of Investor Behavior (QAIB), 12/2006. QAIB calculates investor returns as the change in assets after excluding sales, redemptions, and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses, and any other costs. After calculating investor returns in dollar terms (above), two percentages are calculated: Total investor return rate for the period and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period.  The fact that buy-and-hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future.

Fact #2 Professional Money Managers Are Unable to Consistently Beat the Market

Less than 1% of active money managers consistently beat the market over more than a few years.  It is impossible to discern if it was due to luck or skill.  It is impossible to select winning money managers in advance.

Mutual Fund Manager Underperformance from 2004-2008

“The belief that bear markets favor active management is a myth,” Standard & Poor's Indices Versus Active Funds Scorecard, Year End 2008

New York Times “The Prescient Are Few” by Mark Hulbert July 13, 2008   

The study, “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimating Alphas,” Its authors are Laurent Barras, a visiting researcher at Imperial College's Tanaka Business School in London; Olivier Scaillet, a professor of financial econometrics at the University of Geneva and the Swiss Finance Institute; and Russ Wermers, a finance professor at the University of Maryland.  

“New York Times “The Index Funds Win Again” by Mark Hulbert February 22, 2009

Mr. Kritzman, who also teaches a graduate course in financial engineering at M.I.T.'s Sloan School of Management, set up his study to accurately measure the long-term impact of all the expenses involved in investing in a mutual fund or hedge fund. Those include transaction costs, taxes and management and performance fees.  Mr. Kritzman calculates that just to break even with the index fund, net of all expenses, the actively managed fund would have to outperform it by an average of 4.3 percentage points a year on a pre-expense basis. For the hedge fund, that margin would have to be 10 points a year.  The chances of finding such funds are next to zero, said Russell Wermers, a finance professor at the University of Maryland. Consider the 452 domestic equity mutual funds in the Morningstar database that existed for the 20 years through January of this year. Morningstar reports that just 13 of those funds beat the Standard & Poor's 500-stock index by at least four percentage points a year, on average, over that period. That's less than 3 out of every 100 funds.

Fact #3  Small and Value Outperform Large and Growth Stocks Over Time

Fact #4 Your Broker Does Not Have to Make Recommendations in Your Best Interest.

The Wall Street Journal, “The Fight Over Who Will Guard Your Nest Egg,” By Jason Zweig.

“A power struggle in Washington will shape how investors get the advice they need.  On one side are stockbrokers and other securities salespeople who work for Wall Street firms, banks and insurance companies. On the other are financial planners or investment advisers who often work for themselves or smaller firms.  Brokers are largely regulated by the Financial Industry Regulatory Authority, which is funded by the brokerage business itself and inspects firms every one or two years. Under Finra's rules, brokers must recommend only investments that are "suitable" for clients.  Advisers are regulated by the states or the Securities and Exchange Commission, which examines firms every six to 10 years on average. Advisers act out of "fiduciary duty," or the obligation to put their clients' interests first.  Most investors don't understand this key distinction. A report by Rand Corp. last year found that 63% of investors think brokers are legally required to act in the best interest of the client; 70% believe that brokers must disclose any conflicts of interest. Advisers always have those duties, but brokers often don't. The confusion is understandable, because a lot of stock brokers these days call themselves financial planners.”

Investment News, “Assets at RIA firms hit $42.3 trillion” September 22, 2008, By Sara Hansard

“Growth reflects consumer preference for 'objective' planning  At a time when major investment banks are failing, the independent-advisory business is flourishing, according to a recent research report. The "rising consumer demand for objective independent advice" caused the growth, said Dan Inveen, senior research manager at Moss Adams LLP of Seattle.”

Why aren't these facts conventional wisdom?

It is a $100 billion dollar question. The answer is because if investors were more informed there would be less profit for the brokerage firms, active money managers and the financial media. New York Times “Can You Beat the Market? It's a $100 Billion Question” by Mark Hulbert, March 29.

“Professor French's study can also be used to show just how different the investment arena is from a so-called zero-sum game. In such a game, of course, any one individual's gains must be matched by equal losses by other players, and vice versa. Investing would be a zero-sum game if no costs were associated with trying to beat the market. But with the costs of that effort totaling around $100 billion a year, active investing is a significantly negative-sum game. The very act of playing reduces the size of the pie that is divided among the various players.”

Take control. Schedule a no-obligation discovery meeting today.

Make an appointment with our convenient online calendar.