Naughty or Nice Investments?
If you are like most investors this year, you have been eyeing the market and asking yourself if an investment is a good one (nice) or a bad one (naughty). Knowing can be challenging, but active investors and fund managers ask themselves this question daily. By doing so, they are trying to outsmart and out time the market based on the answer.
Before we answer what is naughty or nice, let us dive deeper into active investing. Over the course of ten years, an active investor will have to make an unfathomable number of decisions to manage a portfolio. The probability of not outsmarting the market is extremely high, which means that some loss in performance will come as a direct result of making a bet on a position that didn’t pay off. As a result, many actively managed funds fail to survive ten years. Next, look at the probability of beating the market in any given year. In 2022, a study showed that 80% of active managers failed to meet or exceed the S&P 500, and the percentage of active managers who beat it one year and beat it again the following year is even smaller.
Next, let’s talk about the obvious alternative to active, which is passive. Passive investing, in the extreme, is holding onto a fund with no thought of making any changes. Being this passive is likely too far of a pendulum swing when trying to find out what is best. Instead, we submit that there are a few key elements to a “nice investment”:
- The person choosing the investments should have a philosophy for why they chose what they chose, and that philosophy should be easily articulated and apparent to you when looking at the holdings in your quarterly investment statements.
- You should gain an edge in the market by choosing low-cost and tax-efficient investments to not give away performance with inefficient funds.
- You should be diversified so that you can take advantage of multiple sectors of the market while at the same time hedging losses in any one area.
- Time horizon and risk tolerance should be built into your portfolio.
What should you do with this information? With any naughty or nice list, we advise you to check it twice. Contact us and let us evaluate your portfolio and provide our perspective. Ultimately, there is more to a good advisor than performance, but a well-educated consumer is a better consumer.