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.