Over and over, reams of academic evidence clearly show that actively managed mutual funds rarely outperform their respective index. What is SPIVA? The index versus active scorecard produced by S&P/Dow Jones Indices. They track a database of thousands of mutual funds and update their findings every six months while making an objective, comparative analysis across asset classes. The results and the reasons behind those results speak for themselves. Watch this informative, three-minute video to learn more.
Having a reasonable estimate of what future expected returns are likely to be is important to developing a long-term financial plan. Typically those estimates are based upon historical market data. That being said, one can never guarantee future performance based on past results. Warren Buffet, also known as “the Oracle,” has notably stated, as many other of his contemporaries, that people should expect lower “real returns” (after inflation) than they have been previously accustomed to over the course of the last century.
If indeed we are entering an era of lower investment returns, it’s more important than ever to make sure that we capture as much of the financial markets’ returns that we can. This is one of the biggest reasons why using investments with very low expenses is so important. But above all else, remaining disciplined and patient as an investor, while never attempting to time the market, is paramount to your future financial success.
Whether future returns for financial assets over the next decade are lower than they have historically been will remain to be seen, but it’s always prudent to be conservative in planning so that the only surprises we have, are hopefully good ones.
Many investors often fail to understand that financial planning isn’t a one-time task, it is a lifelong process. Depending on life events and other factors, there may be times when you will have to update and make changes to your financial plan and portfolio. There may come a time when you’ll need to make tough financial decisions, and during these times it can be invaluable to have an experienced, caring advisor in your corner. When people try investing on their own, they often fail to properly and regularly rebalance because the idea of selling something that has gone up, and buying more of something that is temporarily down, seems counter-intuitive. But maintaining the appropriate risk-adjusted return profile of your portfolio is most important, and vital to your future financial security.
Technology can be an invaluable tool in many areas of our life. However, when it comes to helping you reach your financial goals and guiding you through times of market volatility, it is paramount that you have a caring, personal financial advisor. And as the following brief video highlights, advice given by a robo-advisor, via an algorithm, will never be a substitute for personal interaction with an advisor at times when you may need it most.
Diversification, supported by academic evidence, is the most highly recommended investment strategy for managing risk and leveraging higher expected returns over the long term. Though not guaranteed, the probability is much higher for a well-diversified portfolio to grow over the long term, while helping reduce risk. Although a small fraction of investors occasionally “get lucky” by picking the home run stock, country or industry at the right time, the odds of that happening are less than what one would expect by pure random chance. Thus, it’s strongly advisable to those who are looking to preserve and grow their assets over time to invest in a beautifully diversified portfolio of low-cost, broadly diversified institutional asset class funds, or index funds. By doing so, diversification eliminates the lucky chance of making a killing, but most importantly you won’t get killed.
When looking at emerging industries, investors should be cautious of the hype. Identifying winning sectors in emerging industries is a crap shoot, especially for those who are looking to sustain a long-term portfolio. The best way to approach investments is to diversify broadly across industries, as well as throughout the global markets.
In this edition of our video blog, we review new findings that indicate poor investment decisions are often made when a person is stressed. Investors have emotional and physiological triggers that can make them prone to take more risk than they should, and in this study, key indicators suggest that in stressful situations, hormone levels increase (particularly cortisol and testosterone), and the result was an inflated sense of optimism about riskier stocks. The role of an experienced, level-headed advisor, can be invaluable during emotional and stressful times.
Time and again, the evidence shows that only a small fraction of actively managed funds succeed in beating the market with any degree of consistency. And, that’s without taking into account “Survivorship Bias.” Survivorship Bias is the tendency for mutual funds with poor performance to be closed, or merged into other funds by mutual fund companies. A widespread phenomenon in the industry, Survivorship Bias, results in an overestimation of the past returns of mutual funds and means that many actively managed funds are doing even worse than reported if Survivorship Bias is taken into account.
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On the Air
Tim Decker hosts the weekly radio show “Financial Freedom” on WHP 580 AM Harrisburg every Saturday at 10:00 am Eastern.
He brings his extensive knowledge and over 28 years of experience to the discussion of current financial and wealth management topics. Each show also includes a Q&A session when Tim provides straightforward, unbiased answers to questions from callers. This is the program that represents your best interests, not Wall Street's.
ISI Financial Group helps clients take all necessary steps to properly develop and implement a holistic financial plan using evidence-based, time-tested strategies centered around financial science. In his book, “The Sleep-Well-At-Night Investor,” Tim Decker shows readers how misinformation from the mutual fund industry has created widespread harm amongst investors. The book also discusses the temptation to think of investing like gambling, and the tragedy of gambling away savings and security under the guise of investing.