Whoa. What a smart sounding title. I am a jenius.
For those of you unfamiliar, the title is the usual disclaimer in the small print whenever your financial advisor suggests the latest hot mutual fund. Sure, the fund might be doing better than Tom Brady at a supermodel conference, but that doesn’t mean the fund will continue to do so in the future. In fact, it might start to suck pretty badly, faster than I’d suck at a supermodel conference.
Who am I kidding? I would never be invited to a supermodel conference. I’d have to sneak in the back door or something. (HA DOUBLE ENTENDRE)
Anyway, most investors are quite aware of this disclaimer. Those of us who are anti mutual fund will crack it out, with a stunning zeal when pointing out how a mutual fund couldn’t possibly replicate those stellar results in the future. Every fund manager has to regress to the mean at some point, since funds that do well attract tons of capital from greedy investors. It’s more difficult for a manager to beat the index with a bigger fund, for all sorts of reasons.
As investors, we’ve got the first part of this disclaimer down pretty good. Sure, using a manager with a good track record may help us continue that track record, but the results are hardly guaranteed. At some point, unless the guy running things is Warren Buffett, the fund will regress. It’s only a matter of time.
And yet, the same people argue that stock market returns going forward will suffer. Sure, the market has returned well over 8% over the last 100 years, but it can’t possibly do that now. The best investors can realistically hope for is 5%, or maybe even less. The economy is terrible, everybody is unemployed, and inflation is making everything unaffordable.
But don’t you see that, by making those predictions, that you’re suffering from the same lack of logic as someone who thinks their mutual fund will outperform the market forever? There’s little evidence that long term stock market returns will lag. Sure, the next year or so doesn’t look too rosy, but nobody can predict much further out with any accuracy.
Plus, the stock market is a leading indicator. Remember how it started to move up in March of 2009, even though it still looked like the world was about to end? That’s because participants in the market have the ability to look ahead and realize that most of the bad things have already happened. Typically, the stock market will move about 6 months in advance of the actual economy.
This is a short post. I’m sleepy and I have all sorts of chip related things to do tomorrow, so I’ll get to the point. I don’t care how many people agree that stock market returns will suffer going forward. They’re making long term predictions based on present facts. Don’t listen to them. Instead, do your own research, find quality stocks to own, and start the quest of taking control of your own investments.