If you’re an investor, there have probably been times when you’ve asked yourself a few tough questions. Some might include why am I underperforming the market? Why am I underperforming the benchmarks? Why am I in international stocks? And why do I need an adviser? When it comes to investing, these might just be a few of the things that you’ve contemplated because the answers to these questions are not always clear.
However, Zack Shepard of Matson Money shares some insight on a few of these troubling questions. As you read through the questions and answers, please note that they are suggestions from the Matson Money team and do not guarantee future results. Other advisers and investors may offer different recommendations.
1. Why Am I Underperforming the Market?
One simple answer may be that you are not invested in a well-diversified portfolio and have not held it for the long term. Mark Matson and the advisers who follow his investment advice often recommend a long-term, well-diversified portfolio to their clients, in part because investors who chase hot stocks or attempt to time the market have historically underperformed the market according to studies conducted by Dalbar, Inc., e.g. over the last thirty years, the S&P 500 Index has an annualized return of 11.06% vs. the average equity investor at 3.79%. In its 2015 Quantitative Analysis of Investor Behavior, Dalbar defines “Average Investor” as “The universe of all mutual fund investors whose actions and financial results are restated to represent a single investor. This approach allows the entire universe of mutual fund investors to be used as the statistical sample, ensuring ultimate reliability.” p. 29. “Average equity and average fixed income investor”, as used in the same study, is that subset investing only in equity or fixed income mutual funds. See p. 33 at n. 4. Dalbar’s average investor equity and fixed income fund returns are set forth in a table on p.5.
2. Why Am I Underperforming the ‘Benchmarks’?
The generic market indexes used as performance benchmarks are not engineered to reflect the three-factor model followed by Matson Money. The focus of Matson Money when it comes to structuring institutional equity mutual funds consists of mixing small cap and high book-to-market (value) companies with a small percentage of the S&P large cap companies, which does reflect the three-factor model recommended by leading financial academicians.
3. Why Am I In International Stocks?
Over the long term, investment in international stocks has historically provided the opportunity for better returns than the returns available to domestic only portfolios. According to historical index data, while the domestic large cap equity market as evidenced by the S&P 500 index periodically outperforms international markets at specific points in time, over longer periods of time, international stock indexes have often outperformed the S&P Index. While past performance is no guarantee of future results, take a look at the following data as an example:
2014 Return 2000 – 2014 Return
S&P 500 Index 13.69% 4.24%
MSCI EAFE Value Index -4.92% 4.35%
MSCI EAFE Small Cap Index -4.92% 7.57%
MSCI Emerging Market Index -1.82% 7.38%
We should also note that the indexes referenced above are unmanaged, cannot be invested in directly and their returns do not reflect any management fees, transaction costs or expenses. This graph does not reflect actual investor results and no representation is made that your portfolio would experience similar results. The S&P 500 Index is an unmanaged, market-weighted stock index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as determined by S&P Dow Jones. The various Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Indexes are various versions of unmanaged, free float-adjusted market capitalization indexes designed to measure the equity market performance of 22 developed markets, excluding the US & Canada. This index information is used to demonstrate the need to focus on the long term, not the short term.
4. Why Do I Need An Adviser?
Advisers who follow the investment recommendations of Matson Money help investors stay focused in the long run, suggest ways to keep portfolios diversified & balanced and coach you to make thoughtful financial decisions on the market.