Professional fund managers fail to even match the returns of their benchmarks. According to a recent report from S&P Global,
84% of fund managers underperform over a 5-year period.
90% underperform over a 10-year period.
95% underperform over a 20-year period.
As bad as this performance is, these numbers are actually too generous. The performance of many funds are so bad that a lot of the funds are no longer possible to be market to new investors. Therefore, these funds are closed or the assets merged with other funds. Often, not only once but several times. It is actually shocking that only 1 out of every 20 active fund managers beats the benchmark over the next 20 years. Wow!
But did you know that hedge fund managers aren’t any better? These funds can go long or short or into any sector of the market, domestically or internationally but most are still trailing a simple S&P 500 index fund. From May 2005, through January 30, 2023, the S&P returned about 395%. The average hedge fund returned just about 280% and underperformed by about 115%.
But again, as bad as all these professional money managers are, private investors are even worse. The returns of individual investors who own mutual funds do even worse and earn below-market returns in both, up and down years. For example, the S&P 500 returned -4.38% in 2018 but the average equity fund investor was down more than double as much, losing a stunning -9.42%! In 2021, when the S&P 500 had a great year, returning 28.71% the average private individual equity fund investor earned just 18.39%. These numbers are no occasional missteps. It is the norm! Over a 30-year period ending December 2021, the S&P 500 earned 10.65% a year. The average equity fund investor earned just 7.13%. The result: An investor who invested $100,000 in an S&P 500 index fund and reinvested his dividends would have made a stunning $2.1 million in 30 years. The average fund investor turned $100,000 into less than $790,000 over the same period or $1.3 million less!
But why is this? What makes the individual equity fund investor performing so bad?
Investors are too complacent to sell during good markets and too scared to buy during bad spells.
They jump in and out of the market, hoping to be in for the rallies and out during the corrections.
Their decisions to buy and sell are based on emotions.
They chase performance and panic-sell.
And many have no real idea what they are doing.
There is an appalling lack of financial literacy among the private individuals. Even handling money is a very important subject, schools don’t teach it and parents can’t pass on good knowledge either because they have never been taught any useful lessons either. The financial markets are complex, and people do often not even understand most financial terms. The result is that they open investment accounts at their local bank or brokerage with an unknown investment advisor who promises to handle their financial affairs. Unfortunately, we know how this ends up (see above)! Brokers often convert a substantial amount of the client’s assets into the company’s assets, often independently, if you make money or not. The assets are growing slowly or not at all. After a few years, many customers realize they are just treading water. Disappointed, they often start trying to manage their investments by themselves through a discount broker or lately, financial App. While their fees and costs are lower know, they still don’t have the expertise to handle their investments effectively. They underperform badly and become another victim of the statistics above.
Sven Franssen