Monday, December 1, 2014

Long Term Oriented DIY Amateur Investors Beat the Pros ... "Market Averages" Do Better Than the Vast Majority of "Professional Investors"

Today's little known fact to ponder is that long term oriented amateur DIY investors will do better than the vast majority of market professionals by regularly depositing their 'long term' money in a passively managed low cost S&P 500 index fund. And even better results are easy to achieve as well. For those who take the time to learn the basics of individual investing, they will achieve long results which surpass those of both the professionals and the market beating index funds. And to complete the trifecta, for those who can manage to tolerate the volatile and sometimes emotional ups and downs of the stock market from time to time, investing exclusively in a basket of blue chip dividend paying stocks will generate the best results of all. Successful DIY investing can be as simple as 1-2-3.

Contrary to what professional managers of active accounts and mutual fund managers would like for individual investors to believe, the average stock market returns of low cost passively 'managed' accounts are hard to beat in any year. This year has been especially difficult for the so-called professionals. And that's primarily because the actively managed accounts often charge fees and other expenses in excess of 1% annually. Although that may not sound high, it can add up to a ~10% to ~20% annual commission when offset against the average account's gains each year.

And if we measure the performance of a mutual fund or other account on a total return basis (a combination of stocks, bonds and cash), over the long term the portion of the account held in bonds and cash will further weaken the average account's performance when compared to investing in a diversified basket of blue chip stocks.

Thus, low fees and an all-in-stocks approach will generate the best overall returns for long term oriented individual investors.

As Indexes Soar, Active Stock Pickers Can't Get Off the Ground provides this summary:

"Among all mutual funds that invest in big U.S. stocks like those in the S&P 500, only 9.3% are beating the index through Sept. 30 . . . . Although the year isn’t over, that is well under the previous annual low of 12.9% in 1995 and the average of 38.6% over the past quarter-century. Data through Oct. 31 . . . show results nearly as dismal.

That means 2014 “is likely to enter the record books as the year when active equity funds delivered their worst performance relative to the index, net of fees, since at least 1989 . . . .

Can stock pickers redeem themselves, or should you just redeem their funds and turn your whole portfolio over to cheaper “passive” funds designed to match the returns of an index?

Before deciding what to do, it helps to know what is causing active managers to underperform so poorly.

Portfolio managers and industry analysts say several forces are at work—and most of them are probably temporary. . . .

Meanwhile, index-fund investors shouldn’t get cocky about the margin by which they have beaten investors in actively managed funds, says John C. Bogle, founder of the Vanguard Group and father of the index-fund industry. “I’m concerned that people will say that indexing will always win or always win this big,” he says. “This level of outperformance just doesn’t happen for long.”"

Summing Up

Stock market investing need not be mysterious.

It need not be expensive either.

That said, having someone knowledgeable on your team makes lots of sense and is a valuable part of a great personalized plan. Just make sure the 'helpers' are capable investors, don't charge much, and genuinely want to help you as an individual to manage your account.

When it comes to long term successful investing, the DIY way is the best way.

That's my take.

Thanks. Bob.

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