Based on a dismal record of money managers to outperform benchmarks, we have to take the argument that markets are efficient very seriously. Recent statistics shows that 0.002% of Hedge Fund managers outperform the S&P 500 over a period of 5 years time!
When we go about building our investment strategy, benchmark, style, or passive and active investing, we must consider the overall average performance of each investment class over a period of at least five years. Doing so, ensures your money has staying power.
In our own practice, we use only institutional-class index funds. Today it is possible to index almost the entire world. I think that approach gives us the highest probability of a successful outcome with the lowest risk. To the extent possible, I want to see predictable results. I hate underperforming the benchmark more than I would enjoy overperforming. That makes me pretty much like my clients: risk averse.
On a side note:
A special thanks to Dr. Karl W. Einolf, Ph.D. of Mount St. Mary’s University for allowing me the opportunity to lecture his Corporate Finance classes yesterday. It’s truly an honor and I hope I was able to impart some practical knowledge for the students as they go on to graduation and beyond!
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