Contributed by: Angela Palacios, CFP®
Today, maybe more than ever, active managers are the unpopular kid on the block. Over the past 5 years, very few U.S. Large cap managers have managed to beat the S&P 500. Last year, according to Morningstar Inc., was the worst year in modern history for active management underperformance in the U.S. stock category. Investors tend to be very harsh on money managers, giving more importance to what they have done lately as opposed to over longer periods of time.
This is an old chart idea that never gets old. Investors need to be often reminded of this. We hold Wall Street to very tight standards, encouraging them to try to outperform or provide positive returns over very short periods of time when this is very difficult. Looking at the S&P 500 if your investment time frame (holding period) is one year the chances of achieving a positive return are 68%. That’s only a little better than a coin flip. You are at the mercy of the market’s craziness. As individual investors we are usually lucky in the sense that we have time on our side. If our investment time frame is 20 years or more, then the markets have been kind to us offering positive returns 100% of the time.
Source: Robert Shiller, author's calculations. 1-day returns since 1930, via S&P Capital IQ.
Unfortunately, so many investors are busy chasing a benchmark or their neighbor’s returns that they are rarely happy. You do have the opportunity to focus on the long term and have the odds in your favor, but will you?
Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.
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