Free Wealth Management Guide 8 Threats To Portfolio Performance

8 Threats to Portfolio Performance
Presented by: Chris Nolt, LUTCF, Regsitered Investment Advisor Representative

An Educational Resource From
Solid Rock Wealth Management

The last decade has been a challenge for many investors, especially those investing for the long term and retirement.
Given declines in global stock markets, many investors have seen little to no real growth in their portfolios over this period. For example,
$10,000 invested in the S&P 500 Market Index in 2000, was worth just $10,681 at the end of 2011. And this does not take into account
inflation, investment fees and taxes.1
This whitepaper explains why investors’ portfolios may underperform in both bear and bull markets and incur substantial costs in the process. It also details the impact this chronic underperformance can have on achieving long-term financial goals.
Threat 1: The Expenses of an Active Market
Most of us would like to beat the market, but as we’ll explore
in this whitepaper, even many professional money managers
have had a hard time performing better than the market. To
understand why, it is helpful to begin with some definitions.
Active investors (and active money managers) attempt to
out-perform stock market rates of return by actively trading
individual stocks and/or engaging in market timing — deciding
when to be in and out of the market.
Those investors who simply purchase “the market” through
index or asset class mutual funds are called passive or “market” investors.
Active mutual fund managers are typically compared to a
benchmark index. For example, large cap mutual funds are
often compared to the S&P 500 index. To beat the index, an
active mutual fund must perform better than the weighted average return of those companies in the index. And they must do
so while including fees, taxes, trading costs, etc. so they report
a real rate of return.

investors would have paid if, instead, they had simply bought
and held a passive fund benchmarked to the overall stock market. This $102 billion difference, Professor French says, is what
investors, as a group, pay trying to beat the market.
Threat 2: Many Active Mutual Fund Managers Have Failed
to Beat the Market
As you can see from this chart, over the five-year cycle from
2007 to 2011, the vast majority of active mutual funds underperformed the stock and bond markets.
Though past performance is no guarantee of future results,
notice how many of the money managers’ average annual returns were below the average returns of their benchmarks. For
example the average return for all Large Cap funds during this
period was more than 1% below the Large Cap S&P 500 Index.

Mutual Fund Manager Performance from 2007 – 2011

A lot of time and money is spent attempting to “beat” the
market. Professor Ken French of Dartmouth’s Tuck School of
Business estimates that investors collectively spend $102 billion per year in trying to achieve above-market rates of return.2
Professor French added up the fees and expenses of U.S.
equity mutual funds, investment management costs paid by
institutions, fees paid to hedge funds, and the transaction costs
paid by all traders, and then he deducted what U.S. equity

Source: Standard and Poor’s Index Versus Active Group, March 2012. Indexes
are not available for direct investment. Their performance does not reflect

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