The Roman philosopher and statesman Marcus Tullius Cicero once said: "Time destroys the speculation of men, but it confirms nature."
Time has not eroded the relevancy of these words, especially in regards to the financial markets.
The longer the time frame, the more abysmal our track record in successfully picking the right stocks.
In an efficient market, stock prices reflect all publicly available information - and only new information causes prices to change as investors adjust their views of the future.
Since new information cannot be foretold, most stock pickers and investment managers fail to deliver long-term value.
The Standard and Poor Indices Versus Active (SPIVA®) Scorecard regularly reports on the performance of actively managed Canadian mutual funds.
For the five year period, ending Dec. 31, 2011, the SPIVA 2012 report gives us the per cent of actively managed funds that outperform their underlying index.
2.74 per cent of Canadian Equity managers outperformed the S&P/TSX Composite Total Return.
The report has been adjusted for the fact that many of the poorly-performing funds of the past have been swept under the carpet through fund closures or mergers with other funds.
I don't like those odds! Clearly, few active fund managers can outperform their respective market indices.
Not enough bad news? The Dalbar QAIB 2012 (Quantitative Analysis of Investor Behavior) has found that more than the 20-year period ending Dec. 31, 2011, average investors substantially underperformed the market.
During this timeframe, the S&P500 Index of U.S. stocks averaged a 7.81 per cent compound rate of return.
Average U.S. investors only returned 3.49 per cent. That's a difference of 4.32% that was collectively lost to bad behaviour, fees and expenses. This study is only done in the U.S.
Professional fund managers are not idiots, nor is the average investor. However, I think there has clearly been a failure of the notion that we can pick the right stocks.
Active fund management simply adds speculation risk.
What to do? If you consider yourself an investor, don't run for the hills and throw your money at the mercy of inflation-ravaged savings accounts and GICs.
Rather, you need to find an advisor who is willing to face these truths, guide you through the factors of long term investment success and help you build a plan and a portfolio around your own unique objectives and risk tolerances.
The opinions expressed are those of Richard Vetter, BA, CFP, CLU, ChFC, a senior financial advisor with WealthSmart Financial Group/Manulife Securities Incorporated in Richmond. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund.
