Mile High View

Beat the Market With Companies Which Change

Last Friday, Joe Hruska, CEO of RescueTime, joined me on the air to discuss how his company found its nitch.

Last year, a Jefferson National survey found 75.5 percent of financial advisors believe active portfolio managers can outperform an index over the long term.

What we learn from those who have studied the actual returns of mutual fund managers and money managers is that fewer than 20 percent actually outperform over the longer-term 10-year time periods said Charles Ellis, author of Winning the Loser’s Game, and Burton Malkiel, author of A Random Walk Down Wall Street.

Dalbar, the nation’s leading financial services market research firm, performs a study every year evaluating the Standard and Poor’s 500 (S&P 500) and the average mutual fund.

From 1988 – 2007, the S&P 500 was up 11.8 percent and the average mutual fund was up 4.48 percent. In terms of dollars this means if a person invested $100,000 in the S&P 500 on January 1, 1988 and didn’t touch it, on December 31, 2007 they would have $930,000. If the same person had put their $100,000 in a mutual fund for the same time period they would have finished with $240,000.

To beat the market, as so many financial advisors believe they can do, the $100,000 would have had to turn into $1-million or more during those 20 years. And, that just didn’t happen.

Beating the market is difficult. It requires a high level of expertise that most financial advisors just don’t have. Josh Brown, author of The Reformed Broker blog and Backstage at Wall Street, explained this well. Allow me to paraphrase:

Most brokers are phenomenal, world-class sales people. They’ve learned an iron clad sales wrap that, when used well, often produces a logic defying amount of income. But, a great many of these salesmen don’t have the necessary knowledge to actually accomplish anything for their clients. As I (Josh Brown) have come to learn over the years, selling one’s expertise is easier than actually developing one’s expertise, especially as it pertains to investing.


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