Busting a Big Bank Myth

banker xMutual Fund companies and brokerage firms are famous for touting their market beating returns. The assumption is that you, the investor, are a static investor who just buys and holds every fund or stock that they recommend and hold through the good times, the bad times and also reinvests dividends. The reality could not be further from the truth. If you want real world evidence of this, just take a look at your portfolio and match the returns to those the industry touts from its best performing funds. The results aren’t even close. This makes it even more important to follow specific strategies that do work for you and not listen to the Wall Street marketing hype.

What the marketers know, but fail to disclose, is that investors are much more nervous with their own cash. Buy and hold has gone by the wayside thanks to severe crashes starting with the big one in 1987 and the subsequent ones that occurred after the Long Term Capital Management Crisis in 1998, the Internet Bubble collapse between 2000 and 2002 and of course the Financial Crash in 2008/2009. Crashes and crises occur with much more frequency today than ever before and the result is an absolute vote of no confidence in the stock market when it comes to “buy and hold” strategies. In fact the opposite is true.

With the advent of Internet based trading, individuals are now traders, not investors. The ability to make a trade in a millisecond based on bad information or good information is the new reality. Shoot first is the rule of the day. And, the result has been detrimental to the portfolios of the average investor. Look at the chart below for the evidence.

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The number that stands out is 2.6% – the average blended return of equity and fixed income investor. Yes, 2.6% is what the average investor has been able to earn consistently from 2004 to 2013. That’s not how you’re going to get rich – you can’t even beat real inflation (the kind that includes energy and food) with those returns and forget about a comfortable retirement.

Now, look at the strategies that have worked, notably investing in the S&P 500 as an index and in a basket of international stocks. Simple strategies that have been made simpler by the advent of Exchange Traded Funds have worked better than the average mutual fund. But, while those simple investments can beat the average investor’s returns, they can’t be the source of your future wealth. Not even real estate and commodities have been able to perform over this time period.

The answer is to maintain a steady allocation to the entire market while enhancing your returns with proven trading strategies and sticking to them. In a 2003 study by Harvard and Yale, the returns for Insider Purchases and Sales were calculated. The returns showed nothing special for Insider Sales. But, for Insider Purchases, the study showed that the insiders beat the market’s returns by 11.2% per year. Beating the market is not easy when you follow your emotions and not a real system or strategy. It puts you at the mercy of unscrupulous news sources, the talking heads that are often talking up their own book and a market that is bipolar at its best.

Instead, stick to strategies that work and have basis in fact and the empirical evidence to back them up. You want to be on the far left of the chart, not the far right.

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