Talk of unrest in the Middle East fills the airways. These are remarkable times. The rise of oppressed people standing up against their dictatorial regimes is a remarkable historical event.
The excitement of the financial media and the securities industry is palpable. Will the rising prices in oil end our "tenuous" economic recovery and plunge us into another recession?
Robert Prechter certainly thinks so. Mr. Prechter is a "veteran market strategist." He was interviewed for a recent article in the New York Times.
I find it odd that reputable papers continue to publish the views of market forecasters. The article noted that, six months earlier, Mr. Prechter predicted a market crash "...of monumental proportions." Undeterred by the inaccuracy of that prediction (the rise in the S&P 500 index "surprised" him), Mr. Prechter opined that a monumental disaster is looming. He sees no place to hide. Stocks, bonds and commodities are all doomed.
Now add to the mix the rise in oil prices and the looming possibility of a disruption in the flow of oil.
What's an investor to do?
Turning to "experts" seems rational. Actively managed mutual fund managers have their finger on the pulse and the resources to implement their strategies. Why not rely on them to sort this out?
They don't seem to be very good at it.
From 2005 through 2009, thirty percent of U.S. stock funds went out of business. That's almost one-third of actively managed funds. A primary reason for non-survival was their poor investment results.
The ones that survived had pretty dismal performance records. About two-thirds of those that used the S&P 500 index as their benchmark, failed to beat it. Funds investing in emerging markets, where you would think investment skill would shine, had a worse record. A whopping eighty-six percent failed to beat their benchmark index.
I know what you are thinking. Why not find the "winners" and invest with them?
Only 1% of the 2231 stock mutual funds outperformed their benchmark every year from 2005-2009. There is no assurance those funds can repeat their performance in ensuing years.
Bond funds fared even worse. Over the decade ending December 31, 2009, between 83% and 100% of actively managed bond funds failed to beat their designated bond index.
I am not suggesting that Mr. Prechter is right or wrong. The talking heads on CNBC may also get it right from time to time. I am merely noting that real "experts", who are paid millions of dollars to "beat the market", have a very dismal track record.
Putting your faith in them, or in anyone who believes they can predict the direction of the stock markets, is not an intelligent way to invest.
Here's my prediction:
Those who seek to capture market returns will outperform those who try to "beat the markets" by 200% or more over the next decade.
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