The Wall Street Journal reported that hedge-fund manager John Paulson personally netted more than $5 billion in profits in 2010. While this certainly indicates there is serious money to be made in the market even during these challenging times, let’s put this into perspective.
The average hedge fund gained about 10.5 percent in 2010. That sounds pretty impressive until you remember that the Dow Jones Industrial Index earned 11 percent in 2010, and the S&P 500 Index earned more than 13 percent.
Ultimately in any given year, there will be some investment managers who will beat the market. Over 10 to 15 years, there will generally be somewhere between 5 and 15 percent of investment managers who will beat the major market index returns. But what that also means is that 85 to 95 percent of investment managers will underperform their market benchmark. Those odds may be better than the lottery, but I bet most investors would like better odds than that!
It is standard practice to compare investment managers and mutual-fund managers against an appropriate index, such as the S&P 500, to evaluate their performance. So why not consider investing directly in the very benchmarks used to evaluate a manager’s performance?
Let’s look at the potential advantages to the investor:
- Broad investment diversification into thousands of stocks and bonds
- Very low management fees
- Very tax-efficient investing: Because turnover is extremely low, you keep more of what you earn.
- The potential to outperform 80 or 90 percent of active mangers over a 10 to 20 year period of time
- Virtually no likelihood of a permanent loss of value over the long term (unless you make the mistake of bailing out during an inevitable market downturn)
By investing in a risk-appropriate portfolio of carefully selected index funds and asset-class funds, a prudent investor can find a way to invest with confidence, earning meaningful returns that help provide for the lifestyle they desire throughout their retirement years.
For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s newest white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.