Ep. 15 – 21 Questions (Series) – 14. Do you believe you can beat the market?

Welcome to the Real Retirement Financial Planning Podcast. This series covers the 21 Questions to Ask Your Financial Advisor. The list of questions was inspired by Jason Zweig of the Wall Street Journal, and his blog post: The 19 Questions to Ask Your Financial Adviser. Responses to Jason’s questions I read from other advisor websites lacked depth. “Yes,” or “no,” sometimes needs more context and a greater explanation into the whys. The goal of this series is to target the essence of what I think Jason is trying to protect you from, and help you make a better educated decision.


21 Questions to Ask Your Financial Advisor

14. Do you believe you can beat the market?

Jason wants a “no” here. 
Let’s be more specific. What I think he may be asking is do we think we can pick active managers, stocks, or have a strategy for consistently beating the underlying benchmark over the long-term? (Mostly) No. Even with published academic research stating the benefits of tilting toward certain anomalies that have persisted over time, it’s still uncertain if these will hold up in the future. 

Defining “the market”

Most of the time the market is defined as the Standard and Poor’s 500 index, or the Dow Jones Industrial Average. These are the most widely published United States stock benchmarks quoted in the media.

Getting short-term lucky  

There’s too much research that states it’s difficult to persistently beat the market over the long-term after fees. Fewer and fewer can… Yes. Of course. Some strategies, managers, stocks, industries, and your cousin Vinnie, can outperform the market over the short-term.  Taking on more risk can lead to outperformance as well, but it can also lead to tears, and financial ruin when taken at the wrong time.

The most expensive hobby

Taking above market risk is not free. You pay for it with more uncertainty, and greater variation in returns, and (many times) more losses than “the market.” As you get closer to retirement, you may have more time on your hands, and fancy yourself a stock picker in training. Outside of a small portion of your portfolio, mostly it’s a great way to get overconfident at the wrong times, or rack up losses when you’ve already won the game (you’re going to be retired, right!?). Understanding the market, is understanding that you will never understand the market, and that it will consistently humble great investors. Getting lucky is gambling. Not investing. But. You may be better than some of the greats. I don’t know… Most of the best of the best turn into the rest. Falls from glory (flashy or slowly) are common even among the “legends” of our industry.

Hedge Fund Managers 

(1) John Paulson, you may remember him from the big short, and the “Greatest Trade Ever” after netting his hedge fund firm $15 billion betting against sub-prime loans… Now, Paulson is fighting to keep managing outside money (not his own) after a string of heavy losses. Even taking on very risky bets just to get back much of the losses he’s had on the books.
(2) Bill Ackman, He was seen as one of the best hedge fund managers after the financial crisis with blockbuster returns in 2014. He’s had multiple years of poor performance after bad bets, and most recently laid-off staff.
Mutual fund managers
(1) Bill Gross, a fall from grace may be the kindest way to describe Morningstar’s Fixed Income Manager of the Decade in 2010. After a serious amount of drama that led to his exit at PIMCO, and his new shop at Janus, he’s having a very difficult time finding alpha again. And…(One could say it’s really a big mutual fund)..
(2) Warren Buffett, of course Warren has a historical track record many won’t forget, but he’s having trouble keeping the edge and continuing to outperform the S&P 500. Just remember… Taking huge bets ensures that at some point, usually sooner than you’d like, you’re going to be wrong!
Does the firm you work with charging you 1% state that’s their fee for them to “beat” the market?
Do you feel some urge to win, to be better, and, do you know how that can hurt your performance over the long-term?