.....And my attempt to answer it.
Roger, I always wanted a straight answer to this important question: I have $980,000 in various accounts. I don't need the money now (age 40). What kind of returns can I expect from a professionally managed account? Should I just put all my money in mutual funds? I avoid talking to people offering these services, because I feel there's an inherent conflict of interest, and I won't get an honest answer. I will get calls and mailings from these people every month though. (Maybe I should open one.) Bottom line: If the 75% percentile of individual investors can beat the market by 8%, what can a responsible SMA get me?
I'll start with the last point. Nowhere close to 75% of individual investors, or pros, beat the market by 8%. I think that would be statistically impossible for that many to beat the average by any amount let alone 8%. Average 8% return, yes. Beat by that amount, no.
I can't really answer your question on behalf of the profession but I can give you my answer. I am not a swing for the fences kind of manager. I try to give my clients' money the chance to grow when market conditions seem to favor that and I try protect assets when that makes more sense. Where I hope I add value is emotionally sticking to my beliefs about when to get defensive and when to stay fully invested. In a given year I will beat the market by a little or maybe lag it by a little. I have written several times before that if I miss a big chunk of one down a lot in my clients lifetime I will add several percentage points to their average annual returns over a period of years.
On a smaller, shorter time scale I focus on trying to get more of the big picture themes right than wrong and I have had some luck in this regard.
The honest answer about what return you should expect from a SMA is there is no way to set that type of expectation. Think about it, if over the next ten years the market goes up exactly 1% per year, you are not going to get 10% per year from your equity portfolio unless you take much more risk than the market. Too many SMAs don't try to educate clients about this. One cliche' I use is you can only take what the market gives. The next time the market is up 30% I will capture most of the effect. In periods of likely flatish market returns I hope to be smart enough to overweight dividends to increase return. In 2004 I beat the market by a noticeable, but not heroic, amount due more to dividends and getting a couple of foreign themes right than great stock picking. 2005 may not be as good to me and that is an honest answer to all your questions.
I know a lot of people in the business and too many of them take short cuts. If you want to hire an SMA make sure you are really on board with their approach and whatever you do, do not hire a salesman from a brokerage firm or a bank. Thanks for such a good question.
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3 comments:
This is the kind of issue I went through and I think the books in the library cover a lot of the basics. This is the view of an ameuteur, but it's a start.
The studies seem to indicate that the majority of investors, including professionals don't beat the market and that past performance isn't necessarily an indicator of future performance. Indeed one statistically good strategy is putting this years money on last years losers. I'm not recommending this, just that to the extent such things work and returns are averages of many years with lots of short term fluctuations, it works.
OK into this uncertainty came indexed funds in the seventies. Go the library this is the method most of the books tell you to go with. All other factirs being equal you beat on average managed approaches (this doesn't mean some don't work consistently look at Buffet, but before we get to this complexity) indexed funds work on average better than managed funds except...
this is for a "secular bull market." When things are going up put your money in them, stick with them and you do well. This strategy also works well if you forget all details and just dump the money because you have 20 or 30 years to wait. You are basically betting on a casino which over time pays 1.06 on every buck you put in plus dividends. Over time.
At least in the past, of course if you're grim on the American economy... but forgetting that...
There are periods when we are in "secular bear markets." Something like 1929 to the mid forties was one of them. I believe 1968 to the early eighties was another. Stocks go sideways, often down with a thump. Indexing doesn't work so well... yep once we get the safe method it kind of dissipates...
because right now the spx has a p/e back up at 21, this is higher than at any point except the last boom, higher than 1929 so if you believe that stocks have a "real value" and that it might stay stable historically then we are roughly 50% above the average. If you believe that various factors can increase the real value of stocks so that the historical average p/e of 14 is no longer valid, you have to decide, if there is real value how much various factors have changed things.
Or you can decide value is primarily psycholgical. After all Jpaans p/e remains significantly higher than ours after decades of secular bear.
If you think we are pushing the limit then the standard indexed spx is not the way to go. At best it's sideways, maybe thumps down, though again if you don't need the money for 20 years. Other indexes may be the way to go. It does get to be about big picture and strategy.
So now you decide that all this is too messy. You want someone to manage your money. OK remember the majority are going to do worse than if you figure out some sensible balance of ETFs (periodically rebalnced) such as David Jackson recommends. A good one can give you an improved strategy for allocating this. But the way you chose a good one is by listening to what they say and deciding if this makes sense. And you do that by reading and trying to figure out thins because if you have close to a million bucks, a long term management arrangement is a whole lot of money.
Now you can scout for managers by reading the web, a lot of managers are posting their philosophies, having compared and learned to accept ideas that you don't like, assimilating information that contradicts our desires and assumptions is a basic and you can't escape this if you're rational, you can hand details over, but you need to some real work.
For example I suspect your wad may be enough to get Roger. He has good signs, he doesn't make promises, he seems more optimistic than I am, but he's acutely tuned to exit straegies and having someone who gets you out when things go down can save you years of fees, he doesn't make promises, if nothing else he provides a model.
The reality is that even in secular bull markets *some* managers can bring you more than indexing, but the other reality is that unlike the long term stock market if you chose them randomly the odds are against you.
So you need to be able to evaluate. And quite frankly with various pressures coing down, you need one who can give you a reasonable answer not to just how much more money can you hope to make, but how much money can you keep from losing if certain things happen. And have a good list of these things before you go in.
You will find with the good ones, the answers are a bit fuzzy as they try to explain the situation and variables.
- David Bennett
David,
Thanks for posting the comment and the good word. What you write clearly has merrit.
One thing I would point out is your reference to 1929-1941 and 1968-1981. It took 12 or 13 years for the market to get back to old highs but those were not 12 or 13 year bear markets. There was one year, 1939 I think, that the market was up 59% and another from that time period that was up mid30%. The time of the nifty fifty in the mid-1970's had some very good years too. In 2003 the SPX was up 25% or so. It got nowhere near its high but that is they type of year that investors can't afford to miss. Thank you again!
Roger:
The term "secular bear" is making the rounds. One guy who uses it a lot is John Maudlin
http://www.safehaven.com/archive-15.htm
For example it's in the first paragraph of this article:
http://www.safehaven.com/article-2080.htm
His book is making lots of sales so you are probably going to get clients using the term. Essentially it means "generational" and argues stocks run in 10 to 20 year macro cycles.
Another guy sounding the theme, if not the word is John Hussman.
http://www.hussman.net/wmc/wmc041227.htm
At least with web sources there is a lot of weight on this "contrarian" point of view. I personally have no idea, but some of the refutations I've seen are lame.
Anyway in pop investment "secular" bear and bull are pretty popular concepts.
- David Bennett
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