The fact is, most people who are paid to deliver higher returns than the stock market as a whole can’t do it. Data from the S&P Dow Jones Indices show 60% of large-cap equity fund managers underperformed the S&P 500 in 2020.
It was the 11th straight year that the majority of fund managers lost to the market.
There are plenty of good reasons to pay an adviser or fund manager to help handle your investments, but beating the S&P 500 isn’t one of them. The data says it probably won’t happen.
What financial pros are up against
The S&P 500 has delivered inflation-adjusted returns of about 7% per year, on average, for the past 40 years.
So to beat the market, a financial adviser would need to design a portfolio that gets better returns than that.
Is it possible in a given year? Sure it is — plenty of investors and mutual fund managers do it.
But is it possible to predict who will do it? And does the possibility justify the fees charged by the most prestigious fund managers, many of which operate on a “two and 20” model (2% of the portfolio’s value plus 20% of profits)?
Buffett’s famous bet
Warren Buffett, who’s justifiably famous for his investing advice, has frequently argued that, for most people, a simple market-pegged portfolio is a smarter investment strategy than trying to pick winning stocks.
In January 2008, Buffett put this belief to the test: He bet a prominent hedge fund manager a million dollars that an S&P index fund would deliver better returns over 10 years than a fancy and expensive hedge fund portfolio consisting of actively selected stocks.
Buffett made this bet before the stock market collapsed in the financial crisis of that same year. But it didn’t matter — by 2015, the hedge fund manager had waved the white flag and admitted he’d lost.
Buffett’s index fund had made 7.1% per year; the hedge fund had made 2.2%. It wasn’t even close.
Anyone who wants to prove Buffett right yet again can easily do so thanks to a new generation of do-it-yourself investment apps, all of which allow you to quickly and painlessly assemble a stable portfolio with low fees
And some apps even allow accredited investors to invest in U.S. farmland, which over the last 30 years has performed even better than the stock market, according to industry research.
What a good adviser does
Investment advisers needn’t worry about beating the market because that’s not really the job of a good adviser.
A good adviser will work with you on your medium- and long-term financial goals, in ways an app or algorithm can’t replicate.
Are you saving up for a new home or a comfortable retirement? Maybe you’re saving up to pursue a post-retirement dream.
These are real-life questions that a real-life adviser can help you answer.
You should also have reasonable access to your adviser to discuss your investments and get personalized advice. If you call, your adviser — not an assistant — should pick up the phone.
As with Buffett’s slow-and-steady wisdom, these aren’t sexy ways to make fast money playing the market.
But if your adviser is promising you fast money, you should probably find a new adviser.
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What should you do?
The best way to avoid being disappointed by your adviser is to not set yourself up for disappointment.
No matter how well a financial professional is dressed or how confident they sound, the data shows their investment picks likely won’t outperform the S&P 500.
A DIY investment app like Acorns can take the guesswork and heated negotiations out of investing. The app can automatically invest your spare change into a balanced portfolio. You won’t notice the contributions but you will notice the returns.
No matter what you do with your investments, you should never pay someone for a promise they can’t keep. A good adviser would tell you that.
Fine art as an investment
Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.
That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.
Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.
And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.
On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.
Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.
Investing in art by the likes of Banksy and Andy Warhol used to be an option only for the ultrarich. But with a new investing platform, you can invest in iconic artworks just like Jeff Bezos and Bill Gates do.