It’s impossible to predict what the stock market, or any index, like the S&P 500 or Nasdaq, is going to do in any given year. This unpredictability and volatility leads many investors to believe they can’t invest on their own and should pay a fund manager to do it for them.
Not taking control of your own investing portfolio might be a mistake.
The year 2020 marks the eleventh consecutive year that the majority of active fund managers failed to beat the S&P 500.
Is It Better to Invest on Your Own or Pay a Fund Manager?
Everyone wants to make money on the stock market. That’s the point of investing. To get a broader look at how the stock market is performing investors follow two of the most popular indexes: the S&P 500 and the Dow Jones Industrial Average.
The S&P 500 is a market-capitalization index comprised of the 500 largest U.S. publicly traded companies. The Dow Jones Industrial Average, on the other hand, tracks the stock prices of 30 of the biggest American companies.
Because everything is relative, investors gauge how well their investments are doing against these two indexes, especially the S&P 500 since it looks at a broader slice of Wall Street. Your goal may not necessarily to beat the S&P 500 in any given year, but it’s a good measure to see how well your investments are doing.
Again, many investors don’t feel confident enough to invest on their own, so they hire a fund manager to do it for them. Fund managers are trained to invest your money and get the best possible terms, especially during times of volatility.
Do Active Fund Managers Charge a Fee?
To take advantage of this experience you need to pay a fee. In Canada, the average fee is around 2.3%. If you have an investment portfolio of $100,000, they are taking $2,300 off the top each and every year. If your portfolio climbs 4.6% in a year, you’re basically back to where you started.
It turns out you might be better off investing on your own. According to data from S&P Dow Jones Indices, 60.3% of large-cap equity fund managers underperformed the S&P 500 in 2020. This represents the eleventh consecutive year that professional fund managers lagged that benchmark.
One of the big reasons why active fund managers tell you to trust them with your money is because they claim they can do better than you, especially during times of heighted volatility. Well, 2020 had lots of that. The S&P 500 entered 2020 at record levels, but between February 19 and March 23, the index crashed 33.8%.
Despite facing the worst economic crisis since the Great Depression and worst health crisis in a hundred years, the S&P 500 came roaring back, hitting a new all-time high in August and finishing the year up 18.4%.
While active fund managers may not set out to beat the S&P 500, everyone wants to. It shows you’re smarter than Wall Street and Bay Street. As a result, fund managers will usually look at stocks in the S&P 500 and look for exposure to equities outside the S&P 500. And they will adjust their portfolio to take advantage of emerging opportunities.
This means they should be getting close to beating or beating the S&P 500 on a regular basis. But they aren’t. In fact, active fund managers are more likely to underperform the S&P 500.
But what if your fund did really well this year?
Time isn’t on your side. History shows that funds that outperform the S&P 500 are unlikely to do so in the following years.
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