Peter Watson, Dollars & Sense|May 08, 2013 - 2:55 PM
From http://www.insidehalton.com/opinion/columns/article/
Why do people invest in a manner that consistently gives them inferior investment returns?
There are two basic but very different approaches to investing. The most common and least successful is to invest in products that use active managers. The second, lesser-used way, is the passive management approach, which mimics an index or provides a broad market exposure.
Standard and Poor’s has been tracking the success of active managers for years. Active managers make ongoing investment decisions on behalf of their clients, who usually hire them by purchasing the mutual funds they manage. Within a mutual fund, active managers decide what stocks to buy and sell and the timing of those transactions.
Mutual funds charge investers fees to delegate investment decisions to an expert, the mutual fund manager, but the outcome is most often less than favourable.
The science of investing has been studied and written about by the academic community for the last 50 years. The conclusion is active managers only outperform the underlying market they invest in about one in every three years. When they outperform, the gains are lower than their shortfall during the years they underperform.
Standard and Poor’s reports the same information and break it down into shorter time periods.
In 2012, 41 per cent of active managers of Canadian Equity funds beat the S&P/TSX Composite Total Return. When we extend the holding period, we see only 10 per cent of active managers beat the index over the past five years. In the U.S., 12 per cent of managers beat the S&P 500 Total Return as measured in Canadian dollars during 2012. During the last five years only five per cent outperformed the index.
Consider the Standard and Poor’s information as a report card for active managers, who do not get a passing grade. Canadians have approximately $800 billion invested in mutual funds and most are actively managed.
The Standard and Poor’s report summarized the performance by stating, “The only consistent point we have observed over a five-year horizon is that a majority of active managers in most categories lag comparable benchmark indices.”
Investment decisions and their performance are vitally important to our well-being as investment dollars help finance our children’s post-secondary education and our own retirement. If active money management doesn’t add value when comparing the performance results to the markets in which they invest, then why pay any form of cost to continue to invest this way?
Now is the time to answer that question and re-evaluate how you invest.
Submitted by Peter Watson, MBA, CFP, R.F.P., CIM, FCSI., Certified Financial Planner
May 08, 2013 - 2:55 PM
From http://www.insidehalton.com/opinion/columns/article/