“More.” That’s the response when a young child eats her first piece of birthday cake. It’s also the quintessential response to investment information; however, much as it is with birthday cake, more information is not always better. But that doesn’t stop investors from behaving like gluttons.
In some ways, the quest for more information and for better information often leads, not to superior decision making, but to decision making impasse. At some point, as the saying goes, you have to decide whether to fish or cut bait. That is, are you an investor, or an investment researcher?
I’d argue that most of the information do-it-yourself investors collect on the web and from newsstands and television is not useful, and potentially very harmful. Bolstered by all kinds of information, these investors likely feel very confident in their investment decisions. Of course, it’s important to remember that we tend to collect and process information that supports our views and ignore information that challenges our positions. For example, someone convinced that the emerging markets present terrific growth opportunities would gloss over articles that detail the investment risks.
To understand that more information doesn’t necessarily translate into better investment performance, we have to look no further than the recent performance of hedge funds. For all their talent and information resources, in recent years, hedge funds have failed to delivered alpha. Specially, from 2008 to 2014 the HFRI Fund Weighted Composite Index posted an average annual return of about 3.5 percent, versus 9.8 percent, including dividends, for the S&P 500 index.
And, although we are all very familiar with the required disclosure on all mutual fund marketing materials, “Past performance is no guarantee of future results,” individual investors continue to invest in the “red hot funds” of the moment. This persists even given SPIVA data that reports that based on data as of December 31, 2014, 86.44% of large-cap fund managers underperformed the benchmark over a one-year period. Over 5- and 10-year periods, 88.7% and 82.1% of large-cap managers failed to deliver incremental returns over the benchmark, respectively. Additionally, 66.2% of mid-cap and 72.9% of small-cap managers who lagged the S&P Midcap 400 and the S&P Small Cap 600, respectively, on a one-year basis. And, the overwhelming majority of mid- and small-cap fund managers also underperformed their benchmarks over the longer-term horizons. There are also some pretty sobering statistics that show that funds that do outperform have trouble maintaining their top dog status. Out of 681 funds that were in the top quartile as of September 2012, only 9.8% managed to stay in the top quartile at the end of September 2014. And less than 1% of large- and mid-cap funds managed to remain in the top quartile at the end of the five-year measurement period.
Still, we want to remain in control, so we consume stories that focus on cause and effect. The Fed said X and the market responded with Y. Of course, as you know from any other corner of your life, whether it’s monitoring your health, your child’s grades, or the performance of those you manage at work, situations very rarely unfold in a direct cause and effect fashion. Life’s more complicated than that. And so are the markets. Just as you wouldn’t make the decision to end a friendship or quit your job based on one bad event, so, too, must you take a longer view of the market.
In closing, avoiding the kind of market noise helps you to avoid one of the most common investment mistakes – buying high and selling low. In fact, when stocks are depressed and the talking heads are talking all about the reasons to exit a sector that may, in fact, be the best opportunity to buy.
Working with a trusted advisor ensures you don’t get swept along with all the market noise and chatter. Like starting an exercise program, you can always find an excuse to postpone investing in your future. You need more information. In reality, you have all the information you need except a plan and someone to hold you accountable. Your trusted advisor can help you construct an appropriate portfolio based upon your goals, concerns and risk tolerance.
The best time to invest is when your systematic investment plan dictates you should invest plus when you have excess cash.