Here are three common misconceptions that really hurt your returns and jeopardize your retirement.

#1 “Sure things” are really “sure”

Financial author, Larry Swedroe, compiled a list of “sure things” predicted by market pundits at the start of 2017.

Of the eight predictions, only two actually happened.

If you invested based on the other six predictions, you lost money.

There are no “sure things” in investing.  Those making predictions are emperors with no clothes.  When they are right, it’s luck and not skill.  They’re hoping you won’t know the difference.

#2  You can replicate returns of endowments

Yes and no.

Large endowments have advantages the average investor can’t replicate.  They have an economy of scale, which gives them access to investments not otherwise available.  An analysis by Vanguard showed that large endowments had an annualized return of 9.7% over a 30 year period, compared to 8.0% for a portfolio of low management fee index funds, allocated 60% to stocks and 40% to bonds.  These funds are readily available.

Here’s where it gets interesting.  During most of the time periods evaluated, this simple 60/40 portfolio beat the returns of endowments that weren’t in the largest category.

#3  Buying Funds With Stellar Past Returns Makes Sense

You would think that a fund manager who generated stellar returns would be likely to repeat that performance.

Not so.

Another analysis from Vanguard, looked at the performance of actively managed mutual funds that ranked in the top quintile for the five years ended December 31, 2011.

Only 16% of them remained in the top quintile for the five years ended December 31, 2016.  A whopping 46% of these stellar performers fell to the bottom quintile (21%) or liquidated or merged (25%).

Clearly, relying on past performance is not an intelligent way to invest.

For many investors, ignoring the pundits, not investing in any actively managed fund, and buying one of Vanguard’s LifeStrategy Funds (in whatever asset allocation is suitable) is a sound, responsible and intelligent way to invest.

You may even be able to boast that you are a better investor than most endowment fund managers!

Resource of the week

Vanguard’s white paper on the performance of endowments is an eye-opener.  I highly recommend it.

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