The share market has a dirty secret. It’s really hard to beat the market.
“But property is so hard Jon. Why don’t you just invest in the stock market.”
Well, I do. Of course I have money invested in stocks.
But I don’t play the market. I’m not out there trying to pick winners, and I’m not paying fund managers to do it for me either.
Why?
Because stock-picking is hard and fund managers suck.
I mean, have you looked at the odds?
If you’re going to pay someone to invest in the stock market for you – using what they call an ‘active manager’ – someone who goes out and researches companies and decides what to invest in – what are the chances that they’re going to make you money?
And to be clear on what we mean there, when I say ‘make you money’, I mean over and above what you would have made if you had just passively invested in an exchange traded fund (ETF) – something that just blindly follows the ASX200 or something.
So what are the odds that your active fund manager is going to make you money?
Are you ready?
10%. Maybe 20% if you’re lucky.
No, seriously. That’s the actual odds.
This data comes from S&P’s SPIVA research unit, which has tracked the performance of active managers relative to their indices for over 20 years.
The key take-away?
“Most active managers underperform most of the time”.
How do you like them odds?
The data shows that in the past year, 50% failed to beat the market.
That is, if you were investing in an active fund manager, it was a coin-toss as to whether they actually made you money or not.
(And I don’t think this is even accounting for fees. If you were one of the lucky 50%, you probably paid an out-performance fee.)
But then here’s the thing. Time is not your friend here. The longer you’re in the game, the worse your chances get.
Even over just 5 years, the number of outperforming funds is down to 20%.
There’s a little bit of variation across asset classes here.
International shares are particularly woeful, with 95% underperforming over a 15-year period!
There’s a bit more opportunity in local small and mid-caps, with not-completely-embarrassing 40% over-performing over a 5 year period. But once that stretches out to 10-years it’s down to just a little over 20%.
And that’s as good as it gets.
If you’re paying someone to actively manage your money, the best – the BEST – you can hope for is a one in five chance of making money.
I’m not a fan of those odds.
And just to be clear, this isn’t just an Aussie thing. A separate Morningstar report into over 26,000 funds offered to European investors found that less than one-third of bond and share funds beat their indices in 2022. Less than a third. The five-year stats must look awful.
But this is just the thing. Stock-picking is hard – even for the so-called experts.
It’s not something I have an edge in.
Property though? That’s somewhere where it is possible to have an edge. Where anyone can find a niche and develop their own edge. That’s what I love about it.
And you should see my 15-year numbers. Crushing it.
JG.