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Don't Be Tempted By The Lure Of Active Management - Part 1

Seth Jentner10/16/2014

Every day, Wall Street investment managers research the markets and companies in search of superior returns for investors. This is a noble quest, but how successful are they in delivering these superior returns?

Many investors look for opportunities to earn superior investment returns. It’s not just a matter of earning positive returns; they also want to earn returns that are higher than their neighbor.

And there are thousands of money managers who cater to this desire to beat the market. Mutual-funds and money managers compete with each other in an attempt to demonstrate that they have what it takes to beat the market and earn our business.

But unfortunately, virtually every year, the markets beat the professional money managers! How can this be true?

Each year, the Standard and Poor’s company collects the investment returns of investment managers and compares their returns with the benchmark index that represents the market each investment manager is in. The objective is to determine how well money managers perform. Let’s review the results.

75% of large-cap stock managers underperformed the S&P large-cap stock index in 2012. Well, some concede that might be true of the broad, large-cap stock market. Certainly professional money managers must be able to beat the market in the mid-cap and small-cap segments of the stock market, shouldn’t they?

The results were even worse. 90% of mid-cap stock managers underperformed the mid-cap stock index. 83% of small-cap stock mangers underperformed the small-cap index.

And it’s not much better when reviewing the foreign markets. 74% of the foreign stock managers underperformed the foreign stock index, and 76% of emerging market stock managers underperformed the emerging market index.

How can this be? Aren’t we paying these managers good money to beat the markets? Next week, Bruce Jentner will review what you might want to do about it. Click here to read what he has to say.

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.