Dan Solin June 27, 2017 Personal Wealth A Test For Your Broker Brokers are a friendly lot. They’re also supremely confident of their ability to manage your money. They’re rarely challenged, which is too bad. Many brokers tout their ability to “beat the market”, by market timing, stock picking or selecting the next “hot mutual fund manager. Sound familiar? If this describes your broker, here’s a test to see if these claims hold water. Beat the S&P 500 Index The test is simple. Tell your broker you’re interested in tracking or, optimally, beating the returns of a low management fee, S&P 500 index fund. Use Vanguard’s 500 Index Fund (Admiral Shares)(VFIAX) as an example. The question is simple: Would you be better off buying this index fund or relying on the broker’s purported ability to select stocks from this index which are likely to outperform? Most (but not all) brokers will tell you they’re confident in their ability to pick outperforming stocks. Ask about their methodology Don’t just accept the word of your broker that he (or she) has this skill. Show him data that 88.30% of large-cap funds (which are the funds that use the S&P 500 index as a benchmark) underperformed the index for the five year period ending December 31, 2016. What does he know that these sophisticated mutual fund managers missed? Don’t expect him to be deterred. He’s likely to tell you that this data proves his point. It shows 11.7% of mutual funds outperformed. The trick, he will tell you, is picking the winners from the losers and that’s “why you hire me.” Keep pressing Don’t let his bravado intimidate you. Ask how he selects the “winners.” If there were a foolproof way to do this, why would anyone buy the “losers”? He’s likely to tell you he spends a lot of time analyzing the performance of fund managers who have a track record of outperformance. He relies on past performance to predict future performance. On the surface, this makes sense. When you probe deeper, it’s the formula for investing hell. Lack of persistence The Persistence Scorecard, compiled by S&P Dow Jones Indices demonstrates that relying on past performance is a fool’s errand. According to the most recent analysis, “It is worth noting that no large-cap, mid-cap or small-cap funds managed to remain in the top quartile at the end of the five-year measurement period.” The study concluded, in language that could charitably be described as an epic understatement, “This figure paints a negative picture regarding long-term persistence in mutual fund returns.” A “negative picture”? It obliterates the notion that relying on past returns of a mutual fund is any more reliable than sorcery! Grade the test Your broker will be unable to justify his confidence that he can beat a low management fee index fund. If he persists, ask him to show you a peer-reviewed article justifying his methodology. He will be unable to do so. Give him a failing grade. Then run for the door. A Test For Your Broker blog was originally posted on The Huffington Post website. Dan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Readand his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services. Share: Facebook Twitter LinkedIn Email CIRO Advisor Report
Personal Wealth Dan Solin Investor Smackdown: Your Broker vs. Eugene Fama Jan 17, 2018 Personal Wealth