Originally published on The Huffington Post, September 5, 2017
Wall Street wants you to believe investing is so complex you can’t possibly do it on your own. While some brokers (and most registered investment advisors) add value, many dispense misinformation.
Here are some investing facts those brokers hope you won’t learn.
Forecasts are worthless
The securities industry wants you to believe it has some special expertise that permits it to peer into the future and predict the direction of the market. It also uses catchy phrases like “stock pickers market” to convey the impression it has the ability to predict which stocks will outperform.
Every year, you’ll read predictions trying to explain the failure of active management and why the following year will be different.
These “gurus” know no more than you. Their accuracy rate is about what you would expect from random chance.
There’s no reason to own individual stocks
I understand the appeal of owning individual stocks. Everyone would like to find the next Facebook or Microsoft.
It’s not impossible to succeed, but the odds are stacked against you.
Most stocks underperform the market. Only about 25% of stocks in the Russell 3000 accounted for all the gains for the period 1983-2006.
A whopping 19% of the stocks in the index lost at least 75% of their value.
Your odds of outperforming the index are only about 1 in 3.
It’s just not worth the risk.
Emperors with no clothes
We want to believe there are “gurus” who can help us achieve stellar returns. The financial media plays on this false belief by hyping stock picks from “billionaires” who often run large hedge funds.
Here’s what they don’t tell you.
For the past 8 years, ending in 2016 the average hedge fund returned significantly less than the S&P 500 index.
For the ten-year period ending 2016, the HFRX Global Hedge Fund Index produced a negative return. You would have been better off investing in any of the major asset classes, including bonds.
Hedge fund managers are great at separating investors from their money and reaping hugh profits for themselves. There’s no credible evidence they can do the same for their investors.
Complexity Bad. Simple Good.
According to a recent study, actively managed funds are turning to complex investments (like derivatives) in an effort to outperform their benchmarks. It’s not working.
The study found that using complex instruments was associated with “…poor outcomes for investors such as lower performance, higher idiosyncratic risk, more negative skewness, greater kurtosis, and higher fees.”
Many investors would likely be better off refusing to purchase any actively managed fund. Instead, take advantage of historically unparalleled low management fees in ETFs and put together a globally diversified portfolio, in a suitable asset allocation. You can start your fund research here.
Once you understand that the securities industry doesn’t want you to know these investing facts, you’re well on your way to achieving your retirement goals.