Do you own any individual stocks? If so, it would be beneficial to keep reading. JP Morgan is out with a very interesting piece about the difficulty of investing in individual stocks. The results are pretty astonishing and should make you think twice about committing any serious capital to this endeavor. Here are some of the results from their recent report spanning from 1980 until 2014:
Using a universe of Russell 3000 companies since 1980, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value
The return on the median stock since its inception vs. an investment in the Russell 3000 Index was -54%.
Two-thirds of all stocks underperformed vs. the Russell 3000 Index
What does this tell us? It is really hard to pick stocks. These results show that even just picking a stock that is in the middle of the pack will most likely not get you the average returns you would experience by owning the who market. This is because a small group of stocks seem to drive the bulk of the returns of the market and a greater percentage (roughly 40%) have suffered permanent capital loss. Yes, you may get lucky and pick one of those winners, but the odds are definitely against you. It is a much better odds to diversify and own the entire market, while focusing on things that actually will generate positive results (minimizing costs, optimizing your allocation, reducing taxes, staying disciplined,etc.). It may not be as fun (or as wild of a ride) but the results will speak for themselves.
The largest public retirement fund (California State Public Pension) also known as CALPERS, is going to completely remove hedge funds in their portfolio over the coming year. While this was telegraphed over the past several months, most people thought that the reduction was going to be less than 40% of the total invested, not a complete exit from the space. We have continued to rail against hedge funds and other high fee, complex products over the years, so we think the change is great news for public employees in California. Here is an excerpt from their press release:
“We are always examining the portfolio to ensure that we are efficiently and cost-effectively achieving our risk-adjusted return goals,” said Ted Eliopoulos, CalPERS Interim Chief Investment Officer. “Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost, and the lack of ability to scale at CalPERS’ size, the ARS program is no longer warranted.”
Translation: we are getting out of hedge funds because the only people that seem to make money with them are the managers.
It’s funny because many wealthy investors that we come across have hedge funds because they believe that these managers somehow have the “secret sauce” for investment returns. In addition, when they see all of their wealthy friends using them, they figure it must be the right thing to do. It will be interesting to see if this move by CALPERS makes investors rethink their strategy.
If you’ve been invested in the stock market the last five years, congratulations. You’ve made the most important investment decision…how to allocate your assets (hopefully you’ve had a healthy percentage in stocks). That decision is by far the most influential decision on portfolio performance, so getting the allocation mix right is paramount. One of the next decisions you need to make is how to invest in each portfolio asset class (stocks, bonds, etc). It can be done by purchasing individual securities or through mutual funds. If you are like millions of other Americans, mutual funds tend to be the product of choice. It allows you instant diversification without much capital or labor of buying hundreds of securities.
One of the key questions for purchasing funds is whether you should buy a fund that tries to beat the market or one that matches the market. The majority of investors today are still trying to beat the market. We think this is foolish since the evidence is so overwhelming. Standard and Poors came out with their semi annual research piece on this topic. The results seemed pretty conclusive to us:
Over the last 5 years, we see that in almost every category, 80-90% of all funds fail to outperform their benchmark. The costs associated with trying to outperform an index eventually catch up with these managers, making it difficult to experience sustained outperformance. We have been beating this drum for 10 years (since the inception of our firm) and will continue to do so, as we believe it is a story investors need to hear.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.