The Physician Dilemma - Playing Catchup
Once again, this week’s article will be short and sweet. Let’s get into what I describe as a Physician Dilemma. It should take no longer than three minutes to read.
The topic here is trying to make up for lost time. At least when it comes to investments.
I am pretty sure as you are a physician you know this: You start out earning money later and may have fewer years to save for retirement. Because of this, there may be a temptation to pursue excessive investment returns. For this article, I am going to focus on chasing excessive returns by using “the best of the best.” In this case, that means actively managed mutual funds run by highly educated and trained professional money managers.
First, let’s look at what the S&P500 has done over certain periods of time. The S&P500 is a list of the 500 largest and publicly traded US companies. Actually, there can be more than 500 in a year due to changes in the makeup of the index. I share this as some of my clients like to tell me their MDs stand for Money Dumb😉
$10,000 invested in the S&P500 in 2004 would be worth roughly $63,000 at the end of last year. I will let you figure out what the YTD returns of 20% adds to that total.
Trying to time the market almost always results in missing best days while trying to miss the worst days. Well, by missing only ten best days your return would be less than half of that with a 20-year total of $29,000 instead of the $63,000 number. Had you missed more than the 30 best days your returns would be negative for that same time period. Ughhhh!
To give you a longer-term perspective, the S&P500 has averaged returns of over 11% annually the last 20 full calendar years.
How about we look to see how the best of the best do. We will check during the same 20-year time periods.
The TL/DR (too long, didn’t read) version is over 90% of professional money managers within mutual funds failed to outperform their respective benchmarks the last 20 years. Ouch!
For Large Cap funds the percentage of mutual funds that lagged the benchmarks was 93%.
Over the years I have heard the stories from mutual fund salespeople that Small Cap funds is where professional money management really shines. Yeah, not so much as nearly 96% of these “professionals” lags their benchmarks.
Multi-Cap funds are the same way, so even the ability to move between asset classes doesn’t help their overall performance.
REITs (Real Estate Investment Trusts) have the best long-term record over 20 years. But it was only 9.5% of these managers that beat their benchmark. Good luck picking the one out of ten that will outperform over the next 20 years.
My point with is simple. Sometimes trying to take shortcuts to make up for lost time just doesn’t work. Whether it is trying to time the market or finding the professional money manager who can consistently outperform over a long period. It may be best to follow the KISS method of investing. In this case, Keep It Simple by just following the indexes/benchmarks.