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Understanding the Market

Posted: March 13th, 2017 | Author: | Filed under: Personal Finance 101 | No Comments »

[editors note: We are starting a new series entitled “Personal Finance 101″ to act a primer for various personal finance topics so as to build a foundation for you that you can then use to navigate “Muslim-friendly” approaches. Enjoy!]

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Discover the key to stress-free, reliable, and successful investing

What if I told you that the “best” stock investment advice—meaning the safest, simplest, most reliable, and most successful advice, according to over an entire century of data—that you can find is completely free? What if this advice could be easily applied to your entire portfolio without the help of an active manager?

Wall-Street wants you to believe that this is complete and utter nonsense. That’s because Wall-Street’s actively managed mutual fund industry’s profitability—and in turn, its clients’ financial decline, depends on you ignoring this advice.

You see, the active mutual fund manager’s profitability does not necessarily correlate with your own, despite their employment obligation to convince you otherwise. Let’s make everyone’s objectives clear:

Your goal: to receive a significant, reliable, net positive return on your investments in the stock market to supplement your portfolio, “beat” inflation, and secure a comfortable retirement.

Their goal: to maximize assets under management (AUM), because the more of your assets being regularly “managed”, the more fees and transactional expenses they receive directly from your pocket. This, on average, lowers your return by 2% (2010 Bernstein, The Investor’s Manifesto), meaning that if your portfolio returned 10%, you’ve only acquired 8%.

Sure, these active fund managers will spend their busy work schedules trying to analyze interest rates and predict future company earnings to pick the “best” specific stocks, industries and mutual funds. They use past performance, of course, to make these predictions. But history has shown us time and again that past performance in mutual funds has little to do with its future performance, and that stock-picking to beat the “stock market average” is a nearly hopeless mission. In fact, at the time The Coffee House Investor, by Bill Schultheis, was written, 86% of active mutual fund managers failed to beat the stock market average return in the three, ten and fifteen years prior (1998 Schultheis, The Coffee House Investor).

What exactly is the “stock market average”? It’s the averaged collective return of all publicly traded companies included in any particular index (i.e S&P 500). The return realized from the good companies and the not-so-good companies altogether. And guess what? This collective “average” historically outperforms most actively managed mutual funds.  

In general, the stock market average reliably outperforms 75-85% of all actively managed mutual funds. 

The logical implication here, of course, is that the wise investor should aim to return the stock-market average–nothing less, nothing more. As it turns out, doing so is also the simplest and least stressful way to invest, and it is done via low cost, unmanaged index funds.

 

Key Takeaways

  • Your financial and retirement goals are not in alignment with Wall-Street’s goals
  • Your goal is to maximize investment returns and secure a comfortable retirement
  • The goal of an active mutual fund manager is to manage as many of their clients’ assets as possible to maximize fees and transactional expenses, lowering their clients’ returns significantly
  • Past performance of mutual funds or individual stocks has little to do with future performance, and trying to beat the stock market is comparable to gambling
  • The stock market average, the averaged collective return of all publicly traded companies included in any particular index, historically outperforms actively managed mutual funds
  • Wise investors should aim to receive the stock market average in their returns

 

Click here for related article, “What are Index Funds?”

 

Munir Gomaa is a 3rd year dental student with a passion for personal finance, self-improvement, and human psychology. He can also be found blogging at munirgomaa.com

 



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