It never ceases to amaze me how many people want to overpay to underperform with their investments. In breaking and shocking news (double sarcasm on a Sunday is not beneath me!), Warren Buffett, who has made a few dollars investing over the course of his lifetime, says that buying an S&P 500 Index fund is a better idea for most people than picking individual stocks. Hmm. I’ll go a step further: it’s better for most people than picking individual active mutual funds as well (another shock!).
A few years back, I was working at an investment shop that had several decently-performing mutual fund models that we were able to offer clients. One day, an advisor called me and said one of his clients liked our models, but wanted more “sizzle”. I asked if he wanted fries with that. His client wanted something more exciting (which in this case equals worse performance with more risk and higher fees).
Several years later, working in a bank’s wealth management department, where we offered some outstanding “core/satellite” models with index funds at the core, a client advisor called and said exactly the same thing. I guess solid performance with low fees just isn’t good enough for some people.
I understand what these clients wanted, and I don’t blame them: they wanted to outperform the market. But adding the kind of “sizzle” they were looking for usually leads to the opposite result, and paying more for the privilege. I had numerous clients ask to buy certain actively-managed mutual funds that, it turned out, underperformed the market over the long-term with fees literally 10 times those of a corresponding index fund. It’s like having a BMW Series 2 Coupe, trading it in for a used Dodge Dart, and having your car payments multiplied by 10.
I was reminded of these conversations by a recent article in which Jim Cramer, of CNBC clown show fame, provided the sage advice that people stop buying index funds, and buy stocks that will outperform because of the Coronavirus. Of course! Why didn’t I think of that?! Don’t invest in the whole market; only invest in stocks that will go up, not down! It’s all so simple now!
Except…um, which stocks are those? I tried screening on several websites for stocks that will only go up, and nothing happened. After several nanoseconds of being puzzled, it finally hit me: would I rather be taking advice from someone who had made gillions of dollars investing, or someone who has made most of their money from being a clown? And is wrong most of the time.
Forget the sizzle unless you’re at Outback. I’m not saying that nobody should own individual stocks, but to dump index funds to do so is adding the type of sizzle you would hear from your investment account go up in flames. Personally, I get enough sizzle from watching my investment account grow by investing the right way. Though that might change when my crystal ball gets back from the repair shop…
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