Trust the Market, Not the Marketers - Old Peak Finance

Trust the Market, Not the Marketers

January 19, 2012

2012_trust market

Trust the Market, Not the Marketers

January 19, 2012

It’s been a tough decade for investors in US stocks. There are two common reactions: (1) sell your investments and move into cash or bonds, or (2) give your money to a fund manager who has “beaten the market” in the recent past, with the hope he will continue his winning streak. Both reactions are mistakes.

Bailing out of the market — especially when stocks are down — means you will miss the almost inevitable rebound. The evidence: in the past 80 years, the US market has risen by an average of 10% per year. There have been no 20-year periods that were negative, and only three 10-year periods that were negative. We’ve just lived through one of those, which is why so many people have lost faith in the market. The longer-term perspective suggests you should stay invested. The data on non-US stock markets tell a similar story. And remember that cash and bonds today offer historically low yields.

Giving your money to a mutual fund that has beaten the market in the recent past is also dangerous. Studies show there is no correlation between past and future performance for “actively managed” mutual funds. With over 7,000 mutual funds in the US, there are bound to be managers who do well in any given period. But they are likely to under-perform the index in the future. Luck only lasts so long, and it is extremely rare for someone to be “smart” enough to beat all the other “smart” investors consistently. To beat low-fee index-like funds, these active stock-pickers must do a lot better, year in and year out, just to cover their fees. Usually, they don’t.

I use a diversified mix of “passively managed” stock and bond funds — similar to index funds — because historically they prosper with the market and, with their low fees, leave more money in an investor’s hands. I urge you to do the same, and am happy to show you how such a strategy works.

Stick with the market, and turn your back on the marketers.

This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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