The numbers from 2012 are in. How do the returns from Wall Street’s “Best and Brightest” compare to the returns of the major stock indexes?
One of my main goals at Begin To Invest is to get new investors comfortable with beginning to invest in the stock market. I aim to teach you how to get started investing your savings responsibly while finding ways to save you time and money. This does not mean I aim (or am able) to teach you to how to become the next Warren Buffett, or next high profile stock picker/Wall Street Guru. Rather, for the majority of Americans who have other desires than managing their money every hour of the day, I want to show you where you can put your money to achieve returns that have been historically decent, without having to pay someone to do it for you, saving you tens of thousands of dollars over your lifetime.
This is why I have been a big proponent for the passive investment style provided by index ETFs. For as little as a 0.05% expense ratio (and usually no commission depending on your broker), you can invest in the stocks of hundreds or thousands of companies doing business in every industry all around the world.
So how did this strategy turn out in 2012?
For 2012 the S&P 500 returned 16%! An incredible return despite the headwinds we faced the past year; a gridlocked political system, fiscal cliffs, wars, banking scandals and one of the most expensive natural disasters in U.S history.
This is a near effortless 16% return for any investor. Now 16% is well above average, and you shouldn’t expect these types of numbers every year. But in 2012, it was nearly effortless to get a 16% return for any investor.
So what kind of returns did the all-stars of Wall Street achieve for their clients? Surely they should be able to outperform a simple index fund given their Ivy league educations, complex computer algorithms, and million dollar salaries!
According to Barrons, the average equity hedge fund returned 7.39% in 2012. 8.6% LESS THAN the S&P 500!
In fact, 88% of hedge funds underperformed the S&P 500 in 2012. Not very good considering most hedge funds charge a 2% expense ratio along with taking 20% of the profits generated (If there are any).
John Paulson, who became an all-star on Wall Street after his bets against the housing market in 2007, fell back to reality after LOSING his clients 1% of their money in 2012!
Mutual funds fared slightly better, but still generally underperformed. 61% of stock mutual funds underperformed the S&P 500, according to Bank of America and Lipper Services.
This is not a one-time occurrence, mutual funds and hedge funds consistently have been unable to beat their benchmarks and indexes. As a whole hedge funds have only outperformed the S&P 500 one year in the past ten (2008). In those last ten years the S&P 500 has returned 8.6%, compared to hedge funds which have lost 13.6%!
The same holds true for Mutual Funds, as shown below. Here is a screenshot from Begin To Invest’s FREE E-book, available here:
If this 1% underperformance doesn’t seem like a lot to you, consider how it adds up over the course of your life.
Consider $10,000 in savings today, and adding $1,000 a year generating a 6.5% return each year. The charts below come from Scottrade’s investment calculator, found here:
An ending total of over $220,000 over the next 35 years!
Compare that to a return of 5.5%, just 1% lower, over the same course of time.
Which generates a return of “only” $170,000.
That 1% underperformance costs you more than $50,000 over the course of your life. (If you invested $10,000 today, added $1,000 each year and returned 6.5% each year).
It is generally accepted knowledge today that actively managed equity mutual funds simply cannot outperform the S&P 500 index on a regular basis.
However, investors still keep trillions of dollars under the management of these expensive funds, which charge an average expense ratio of 0.79% – Costing investors nearly $190 BILLION in fees every year. And on top of that they generate lower returns!
For a cost very close to free, you can invest in these indexes which outperform a majority of professional money managers every year.
Managing your money on your own is not hard, and can require only hours per year to manage. Yet this can save you tens of thousands, or even hundreds of thousands of dollars over the course of your life.
If you have not already, check out our free eBook which will get you on the right path, and keep reading BeginToInvest.com for more!