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Wednesday, October 27, 2010
Many times people will tell me their investment advisor is doing a good job. I ask them what their performance has been, and they don't know. To me ,this is an indication right off the bat that the advisor may be doing a good job for him- or herself but not necessarily for the client. Other times, a person will say that they got a return of 12% and "isn't that good in a world where interest rates are practically zero?"
Well yeah...except that if you are invested in the stock and bond markets, your benchmark isn't short-term interest rates. I'll point out that the market was up 15%, so you paid an advisor 1 to 2% of your assets to produce a return 3% below the market. If you had a million dollars with the advisor for a year, it cost you between $10,000 and $20,000 for management fees and another $3,000 for poor performance.
Most advisors underperform the market over longer periods after all fees and costs are considered. There are mountains of data and books written to show this. In fact, such market stalwarts as Warren Buffett, Charles Ellis, Burton Malkiel, John Bogle and Dan Solin have stated repeatedly that trying to beat the market is futile.
They have also pointed to a better way - achieving the market return at a minimal cost. The biggest pension funds in the country understand this and invest significant portions of their assets indexed to market returns.
So how is it that individuals continue to seek superior returns when they are in fact achieving subpar performance and are paying dearly for it? The answer is up at the top. Most don't know it, and many aren't interested in making the effort to understand the basics of investments.
To the benefit of Wall Street, the phrase "ignorance is bliss" definitely holds. I guess what you don't know won't hurt you - at least until you get ready to retire.