Active money managers are having a tough time beating their benchmarks again this year. In fact, fewer than 15 percent of money managers were exceeding the market by the end of November.
You might say active management has hit a rough patch. According to Ben Levisohn of Barron’s, who cites the University of Chicago’s Center for Research in Security Prices, “From June 1983 to June 2014, the median fund underperformed the market by more than 80 percentage points.” That’s 30 long years of underperformance. Ouch.
If you invest in mutual funds, this information should be important to you. In addition to the high fees most funds charge, the majority have underperformed yet again in 2014.
What is an investor to do? Read the rest here: The Arizona Repbulic
Please read my latest blog post at the Arizona Republic, “When and Why Investors Should Own an ETF.”
Exchange traded funds are a low-cost, flexible tool for investors interested in gaining exposure to specific industries. These prolific fund options track your chosen index performance, provide liquidity and cost very little. Ideal for individual investors, especially those just getting started.
As a thirty-year veteran of the market I am astounded by the mystique that surrounds stock investing. Many very smart people I meet believe that the stock market is too complicated for them to understand or, worse, entirely random. Neither is true.
When an investor buys one share of a company’s stock he or she is buying the commensurate portion of that company’s earnings. That is measured by the price-earnings ratio or the p/e. The price-earnings ratio measures how much an investor is paying for company earnings. Generally speaking the lower the p/e the cheaper the stock. Over the long-term p/e is a meaningful and helpful determinate for investors to assess whether a stock is cheap or dear. Investors are often willing to pay a higher p/e for companies with strong earnings growth and less for companies they believe will generate slower earnings growth.
Great companies demonstrate a persistent tendency to perform over the long-term. Take for example two tech powerhouse’s: Google (GOOG) and Apple (AAPL). The hyperlink takes us to a chart comparing the two stocks over the most recent one-year period. GOOG sports a p/e of 22.9X trailing twelve month earnings; for AAPL the p/e is 9.6x. Investors have rewarded GOOG for what they believe to be a stronger earnings future. Consequently the p/e has risen as the stock has outperformed the market and AAPL.
Looking over a longer term period beginning in August of 2004 when GOOG became a public company we see that compared to AAPL, GOOG has performed well but underperformed AAPL. Both are great companies. The difference? Wall Street expectations for earnings growth during the periods measured has changed. Still you would have been well-served with either company. Or both.
Buying great companies pays off over the long term but if that task seems too daunting consider buying an exchange traded fund (ETF) that tracks the S&P 500. Over the last approximately fifty years, despite a number of devastating bear markets, simply owning the S&P 500 index would have generated a return of approximately 1600% .
But you don’t need fifty years to generate excess returns. Remember the study I cited in my first post. According to Wharton professor Jeremy Siegel since 1871 the stock market has generated an average return of 9.4% for every rolling twenty-year period.
Take a look at Vanguard’s VOO for a low cost ETF that tracks the S&P 500. That may just be a great place to start. Provided you are willing to take a reasonably long-term view.
I recently came across a study conducted by InvestingNerd entitled: “InvestingNerd Study Finds Americans Have A Low IQ When It Comes to Online Investing.” (You can read the article in its entirety at www.nerdwallet.com )
The study summarizes the results of a poll recently conducted by InvestingNerd. The staggering lead statistic revealed that four in five Americans could not correctly identify a brokerage account as the proper account to open for stock investment. Alone that result is shocking. But what struck me was their finding regarding the lack of attention paid by the majority of 401k holders on the eroding effect of fees.
For example, InvestingNerd found: “9 in 10 Americans (92.6%) underestimated the 401(k) fees the average household will pay over a lifetime by several thousand dollars. The real average totals over $150,000 per household” (emphasis mine). Long a personal pet peeve, fees are one of the greatest enemies of total return. If you consider that according to the Employee Benefit Research Institute only 24% of Americans report retirement savings in excess of $100,000, average lifetime fees of over $150,000 should matter–a great deal–to every investor.
Frequent readers of this blog know that I am passionate about educating individuals on investing. In fact, that passion is the primary reason I am writing THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING. InvestingNerd puts numbers to the concerns inhibiting most from investing. Their results show: “Just over a quarter of those not currently investing online say they don’t invest because of either uncertainty on how to get started (13.6%) or not wanting to risk losing money (12.8%). Meanwhile, 39.3% say they do not invest because they do not have enough money to do so” (emphasis again mine).
A brokerage account can be opened with as little as $2,000. And fee-sensitive, sound investments can be made via exchange traded funds (ETF’s). Next blog post I will suggest some on-line investing platforms and low-fee ETF’s for your portfolio.
In the meantime: get busy Saving so you can Invest sensibly for the long-term.