A little while back, I wrote about the share market and how it had received a hammering. And last week it happened again but was worse. A lot worse.
If you read the news or listened to it, it sounded like an absolute bloodbath. And maybe to some, it was, but you would have thought the market had reached the lowest ebb possible. And it seemed the market had got its swagger back. And then BAM! We got hammered again.
But all that had happened was that any gains since January were wiped out. When I look at it that way, it does not seem so bad. It effectively meant that, in most cases, anything I held on 31 December 2023 was still positive. Anything after December was probably negative, but I can live with that.
And as I said in that article, low prices are an advantage too. It means you can buy cheap. And we all love a bargain.
The stock market is risky. But it’s not as risky as everyone makes it sound.
And buying when the market is poor is good if you happen to have a Superfund that invests in the share market (most do) and does so regularly. But most people get scared and pull out, which is why you should never pay too much attention to what the market does in a short period of time.
I have an SMSF. And that means, unlike retail funds, my investment purchases are not automatically set up. I can do that, and I should because it is not hard, but I think I am just lazy. After all, I am human, and there are sometimes better things to do in life.
That means every so often, I notice that the SMSF bank balance has a bit too much in it, and then I have what my wife calls financial diarrhoea. It’s as if I become a 5-year-old given $30 bucks in a candy store. Oh, so many choices…..
And at the end of the tax year, it drives Mia, one of the team members at WOW! Advisors nuts because she is the one who must try and work out what I have done and reconcile dividends and purchases. I tend to stay away from her when she does my accounts and tax returns. I fear for my safety.
And that’s why I should put my investing plan on autopilot. Each month, I should automatically buy the same index funds and then forget about it. But I can’t. I need the thrill of buying shares and seeing what happens to them. At the other extreme, I rarely sell unless I have information to suggest what I have bought in the past is a dog.
But buying in lump sums and buying different (often random) things do not work in my favour. And that is why I tell my team that if they are going to invest do it regularly and consistently in a few things.
This, then, quite frankly, is where I categorically do not practice what I preach.
But it seems I am not alone. I follow Morgans regularly, and every quarter, they tweak their portfolios, which means they sell some (which may mean taking losses or creating a capital gain tax bill) and buy others in the hope that going forward, more money will be made. In fact, that is what all investment funds and brokers do. It is what your retail Superfund does, too.
But I am not convinced it always works in the long run. In the short run, yes. But in the long run? I don’t think so.
Here’s why. We are often shown tables showing who the best fund managers are. And if the fund manager makes it to the top, there are many celebration lunches, fat bonuses, and back-slapping. But what happens within 2 years? Well, according to Standard and Poor, only 2% of those funds remain at the top. And that means 98% drop down the table.
There’s more grim news.
That is because, over the past five years, only 5% of Aussie share fund managers have performed equivalently or higher than an index fund ETF after fees.
In other words, 95% do worse after their fees than the market. And I believe that is because:
• They are trying to beat the market by buying and selling different shares within the portfolio and/ or
• They are charging too much in fees.
Now I know what you are going to say. You are going to tell me that such and such investment fund has performed fantastically over the market. And they may have over, say, a year, maybe two years, but you need to check carefully what the returns are after fees.
You see, a typical index fund will charge about 0.5% in fees. If you have a portfolio of $500,000, the cost is $2,500. Now, take a fund manager that charges 2%. That is a $10,000 fee.
If the index produces a return of 10%, the net gain is $47,500 or 9.5% ($50,000 this year less the fund fee of $2,500). On the other hand, the fund manager must get you a gross gain of 11.5% ($57,500) so that after charges of $10,000, you still have the same net return. To beat the market, it needs to generate a return higher than 11.5%.
And that means the investment fund must take higher risks to get there. That may work for a while, but over a period, statistics tell us that the risk does not pay, and you make losses. This probably explains why it is harder for fund managers to always beat the market.
And that is why when Ros & I talk about our investments and their performance, she is the one who smiles more than I because she does it the proper way. Invest regularly and in a small portfolio of index and ETF funds without a fund manager in sight.
Now, that does not mean you do not use Fund managers or do not invest in the portfolio a financial planner recommends. Often, they work especially if you want to invest in emerging markets or emerging sectors, and for large sums of investments, they can be diversified better, too. But keep one eye on charges and the other eye on returns and then hammer them if they are unable to beat the market after charges. That’s because what is the point of employing them if all they can get you is what you could get if you invested in the market yourself?
But you ask why the title of this blog is about dying or being disengaged.
Well, Fidelity (which is one of the biggest asset managers in the world) undertook a study, and what they found was astonishing.
This is discombobulating crazy stuff.
Because (in Fidelity’s own words) over a 10-year period their top-performing client accounts were either clients who had either forgotten about their investments(!) or they were dead(!). In other words, they were totally inactive, did not look at their portfolio, and just let the market do its magic.
It seems we should invest wisely and then forget.
Which means I am doomed. And you might be, too.
Or are we?
Because yes, you want to beat the market, but we don’t always know what to do. Often, we don’t know what we want. We don’t know what to invest in and often we don’t know what the future holds. We don’t know how much we need in retirement, and we don’t know how long we are going to live. We do not know if our portfolio is diversified for risk. And not everyone is confident enough to make decisions.
You need to be Gold Almighty to know these thongs, and because we are not feeble humans, we don’t cut them.
And that is when financial planners and fund managers come into play. Sometimes, it is better to get a lower rate of return knowing that at least you will get something, whereas if you did nothing or make investments in the market that do not pay, you could, inevitably, end up with nothing.
Investing in the stock market is step 7 of our 9 steps to working less, earning more and creating wealth. If you would like to know more, contact Hitesh at hitesh@medisuccess.com.au or call 07 3161 9548.
