Saw this clickbait today…
I’ll save you a click: The article says that a weighted composite average of hedge funds posted a -4.07% return in 2018. That’s 31 basis points better than the S&P 500 with dividends, which returns -4.38%. It’s the first time since 2008 that the hedge fund index beat the S&P 500. Hence the headline.
But wait… That doesn’t mean investors who own the hedge fund index, if that is even possible, would have come out ahead of investors in an S&P 500 index fund. To figure that out, you have to know the expenses. And while we don’t know the exact pound of flesh each of these hedgies extract from their investors, I’m willing to go out on a limb and say the total is far higher than the 0.04% expense ratio that the Vanguard S&P 500 Index carries. I’d even go so far to bet that the difference is more than 31 basis points. If so, the hedge funds might have won, but the hedge fund investors still lost.
But wait, it’s actually worse for the hedge funds than it appears. Investing isn’t just about one random 365 day period. It’s about a lifetime.
Using the handy 11-year graphic comparing returns tweeted by CNBC’s Leslie Picker…
over the last decade plus one year — so even counting the last two years hedge funds actually won — the S&P 500 index has outperformed the hedge funds by a combined 66.24%! So congrats, hedge fund investors. Even if fees are included in the index and you are 0.31% richer than the alternative this year, you are still down HUGE over the last decade.
The best financial advice to come out of this is one simple point: Don’t base your asset allocation solely on what you hear, or read, on CNBC.
Take a few minutes to listen to me talking about my Star Wars/Star Trek loyalties (spoiler alert: I don’t care), what the U.S. is already spending in space, and how to invest in it.
Link is here.
Run immediately over to Institutional Investor and read this excellent piece on all of the fake number crunching investment firms use into making decisions and buying products that are not in your best interest.
The yes blunt but 100% accurate conclusion:
These strategies carry the stamp of scientific certitude, but Wall Street’s researchers, like all scientists, have an ethical responsibility to communicate the limitations of these supposedly systematically proven models to an aroused but insufficiently skeptical, public.
Yet much of their world is bullshit. And yes, maybe we’re a bit too blunt. But we don’t want them to sell you more of what isn’t working.
Read it and don’t be the lower-case fool.
So says CNBC. And he might be right.
But here’s a few more CNBC headlines from the archive:
He could well be right this time. But if there is one takeaway from this, it is that you shouldn’t just sell (or buy) because David Stockman (or anyone else you see on TV) says you should. If you sold everything on April 29, 2014, after watching his interview, you’ve missed out on a 77.97% gain on the Nasdaq Composite.
And even if he is correct, it means nothing for a long-term holder. The S&P lost more than 40% of its value from the start of 2008 through mid-2009. It had fully-recovered those losses by mid-2011.
As always, don’t have money you might need in the next three years or so in equities. And don’t listen to the talking heads and time the market. It’s a crummy business model for CNBC, which is why people like Stockman get on, but it is the best way to handle the stock market.