17 July 2019

Beyond the Hype: Getting Realistic About Returns

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Best Choice Software stood out among all the advisers bragging about their eye-popping returns at the Las Vegas Money Show held in May.

In a promotional video, the Bradenton, Fla.-based firm boasted about a user of its trading software who "turned $1,000 trades into over a quarter of a million dollars in less than a year"—which could be equivalent to an annualized return of 25,000% or more.

Sunny Decker, the company's founder, said in an interview that returns of this magnitude aren't necessarily the typical experience of his firm's clients.

I was a speaker at the Las Vegas event, and perhaps it isn't any wonder I found few people who were genuinely interested in the returns that I said were realistically attainable over the long term: about 10% to 12% a year.

Even that could be considered generous. Since Jan. 1, 1929, the S&P 500 has risen at a 9.4% annualized rate, according to data from Ibbotson Associates, assuming dividends were reinvested. Riskier small-cap stocks are the lone group to creep into double-digit territory, with an 11.9% annualized return since 1929.

Of course, these returns reflect the performance of large baskets of stocks, and it is possible that you can do significantly better by picking individual companies or timing moves into and out of the market.

But the odds of that are poor. Researchers have consistently found that the bulk of advisers who try to beat the market end up lagging behind over the long term, and the select few who are able to do so rarely beat an index fund by more than a few percentage points a year.

A Far Cry

Consider the 200 services tracked by the Hulbert Financial Digest over the past 20 years. The model portfolio with the best return—the "Average Risk" portfolio from the Investment Reporter, edited by Marc Johnson —has beaten the dividend-adjusted S&P 500 by 6.6 percentage points a year. That is impressive, but a far cry from the big numbers many investors think are readily attainable.

It is a similar story with mutual funds. According to Lipper, the domestic stock fund with the best 20-year return, the T. Rowe Price Media & Telecommunications Fund, beat the S&P 500 by 6.1 percentage points a year. (The fund charges annual expenses of 0.80%, or $80 per $10,000 invested.)

Even Warren Buffett, widely considered to be the most successful long-term investor alive, has beaten the dividend-adjusted S&P 500 by a mere 9.9 percentage points a year since 1965. It is worth noting that Mr. Buffett, at the recent annual meeting of his company, Berkshire Hathaway, warned that his future returns won't be as good as in the past.

And don't forget: These impressive returns are among the best most individual investors can expect; the typical adviser did far worse. The median newsletter portfolio trailed the S&P 500 by 1.3 percentage points a year, and the median domestic stock fund lagged behind by 0.3 point a year.

To be sure, returns much greater than these aren't unheard of over shorter periods. But invariably, they come back to earth. When confronted with an adviser promising huge returns, you therefore can confidently bet that his advertising either is outright misleading or reflects performance over such a short period as to be unsustainable.

Your proper response in either case is the same: Ignore him.

Click here for the full column by Mark Hulbert in the Wall Street Journal.

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