Even though the stock market has rebounded from its March lows, millions of individual investors are still stuck in the mud. They’re lost, scared, disillusioned, and confused, which means they’re probably still losing money. Only the best investors adjust their investment strategies to avoid financial catastrophe. And what about the worst investors? They just keep repeating their mistakes, perfecting them until they can stand no more.
Let’s analyze four basic strategies to help you get your investment portfolio on track. If your money is already on track, these strategies will reinforce the rightness of your way.
Stop Betting on the Wrong Horses Around 85% of all mutual fund assets are invested with fund managers that propose to beat the market, while the remaining portion is in index funds and index ETFs that propose to match the market. Even though most fund investors are betting that fund managers will lead them to the Promised Land of outperformance, look at what the numbers say.
Over the past 5 years, Standard & Poor’s reports 71.9% of active large cap funds failed to beat the S&P 500 index (NYSEArca: SPY), 79.1% of active mid cap funds failed to beat the S&P MidCap 400 index (NYSEArca: MDY) and 85.5% of active small cap funds failed to beat the S&P SmallCap 600 index (NYSEArca: IJR). What does all of this mean?
The financial lesson you can take from this, is not that investors need to pick their mutual fund managers more carefully as those that suffer from data misinterpretation deficit (a form of financial puberty) would conclude. Here’s the real lesson: Trust the indexes and the financial products tracking them, not the portfolio managers that try to beat them and fail. Translation: Align your money with winners not losers.