The Closest Thing to a “Secret Sauce” for Achieving Superior Investment Returns
July 12th, 2017 | Posted in Investing
Investors usually judge an investment by whether it beats the overall stock market’s return. And they’re willing to pay money managers handsomely for the opportunity. How’s that working out for them?
According to a recent article on marketwatch.com, not so well.
“More than 90% of large-cap funds lag the S&P 500 Index over a 15-year period,” states Mitch Tuchman, the article’s author. “You might manage to pick the fund that is in that magical 10% of winners. But you won’t have won much for the effort, a marginal beat over the index, assuming the fees don’t eat the difference and more.”
Indeed, annual fees significantly impact “outperformers” overall advantage. “The average expense ratio for an actively managed mutual fund is 0.75%, reports Morningstar. The average index fund costs 0.17%.”
But What About Hedge Funds?
Hedge funds, once the darlings of high net worth investors, haven’t done any better. “Nobody seems to notice or care about the thousands of hedge-fund investors who didn’t pick the big winner,” says Tuchman. “They pay the outsize fees — 2% of assets and 20% of profits — yet get nothing like that crazy one-off payday.”
So, What’s the “Secret Sauce?”
For investors, the best approach may be to forget about “beating the market.” Just be satisfied with keeping pace with it, and only shell out higher fees where they do the most good: for expert advice on creating a solid overall financial plan. “The secret sauce, such as it is, is incredibly boring,” Tuchman says. “Keep costs low, diversify, rebalance and contribute steadily to a portfolio of index funds.
“If you pay any fees at all, make sure it’s for something you actually need, such as risk-adjusted portfolio construction.”
“What you shouldn’t pay for is above-market performance. The data show it doesn’t exist, not even for rich people who theoretically can afford it.”
Good News For Zacks Advantage Investors
“Keep costs low, diversify, rebalance and contribute steadily to a portfolio of index funds” is an accurate summary of what Zacks Advantage does. Of course, this isn’t the first time we’ve advocated for investing in index funds using a long-term perspective For investors seeking superior investment performance, Zacks Advantage may be the closest thing to the “secret sauce.”
Learn more about how Zacks Advantage combines the simplicity and low fees of a robo advisor with performance-focused active management. Download our Overview Guide today!
Sources: http://www.marketwatch.com/story/the-secret-sauce-for-investing-isnt-much-of-a-secret-2017-06-19 http://www.cnbc.com/2017/06/13/is-your-fund-manager-actually-a-closet-indexer.html
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