Despite a multi-decade time horizon investors, led by financial writers often hip deep in the investment services industry swamp, focus on annual returns during January. Funds with the best prior year returns attract new money. However, Mark Hulberg reminds us (Wall Street Journal, Jan. 8, 2018) of the tale of brave Ulysses who roped himself to the ship’s mast and avoided the Sirens’ deadly temptations. Of all the US stock mutual funds in the top 50 percent two years ago a mere 16 percent remain there today.
Legendary investor Bill Miller noted, his Legg Mason Value Trust mutual fund’s 15-year S&P outperformance was nothing more than a fortuitous calendar quirk. An oversized Wachovia position scorched Value Trust investors in 2008. Sometimes it is better to be lucky than good, but the luck pendulum swings both ways.
Top-performing investment managers often take highly risky positions. Sometimes by over-allocating to a risky asset class, sometimes by purchasing volatile assets. For example, last year’s winner, Kinetics Internet Fund (WWWFX), held a 12 percent position in Bitcoin Investment Trust. Astonishingly Kinetics Internet beat the nearest competitor by double digits, an almost unheard of phenomena. Regarding crypto-currencies, Warren Buffett sees a bad ending for them.
Another drag for a fund with high performance is it can be difficult to replicate a successful strategy when investors throw money at you. Traders simply mimic your positions or purchases. Some mutual fund companies, very few, unfortunately, close to new investors. Companies leave money on the table, but long-term investors benefit.
The S&P 500’s 2017 return, almost 22 percent, will be difficult to repeat this year. Jeff Gundlach, Doubleline Funds CEO, predicts a negative S&P return; after all, it has been positive for nine years running. A single year return is not very important, end of story. International and emerging markets beat the S&P last year, returning 24.9 percent and 36.4 percent, respectively. What will happen this year is anybody’s guess, but a strong argument exists the US economy is farther along in the economic cycle while the rest of the world has room for improvement. A better argument, though, is their 2017 performance shows how critical portfolio diversification is.
The Russian stock market had an abysmal 2017, growing less 1 percent, which suits me fine. The sanctions they earned affected their tiny, crime-infested economy. Investors should always be aware of unexpected consequences.
Chasing the hot hands is a wasted effort, but don’t despair as a solution exists. Simply invest in low-cost passively managed funds and own the market. If you think active managers provide value, choose a fund with low fees. Diversify across asset classes and make sure investments are appropriate for your goals, risk tolerance, and time horizon. Then get on with the rest of your life. Investments are only a part of financial planning.
You can’t always get what you want, but Buz Livingston, CFP can help figure out what you need. For specific recommendations, visit livingstonfinancial.net or come by the office in Redfish Village, 2050 Scenic 30A, M-1 Suite 230.