I’ll give you a tip-off from the get-go. If you try to trump the do-nothing, leave-it-alone retirement plan, it’s not going to end well for your portfolio.
Why you’re headed for an unhappy ending is a matter of hard facts. By trying to outwit the market and guess what’s going to happen next, you’ll likely lose money.
The “leave-it-alone” retirement plan is simple: Put about 60% in an index fund holding most of the world’s largest companies. Then put the rest in international bond and real estate funds.
Sound too simple? Most of the time it works because you own a piece of just about everything in the global stock and bond market. It’s when you try to get clever that you get burned.
Here’s why the leave-it-alone plan works, courtesy of the S&P SPIVA report, which tracks the records of actively managed funds vs. passive index funds. Spoiler: Index funds win the majority of the time in total returns.
Keep in mind that S&P’s comparison shows how much active managers underperform their benchmarks, standard gauges for markets. They look at big, medium and small company funds.
Here’s what they found:
– Large-cap core stock funds (77 .04% outperformed by benchmark)
– Mid-cap value funds (77.78%)
– Investment-grade long-maturity bond funds (94.39% outperformed by benchmark)
– Government long funds (93.10%)
– Global income funds (86.15%)
More important is the telling truth about active management over the long-term. “Underperformance was even higher over a five-year period, as 91.91% of large-cap managers, 91.27% of mid-cap managers and 90.75% of small-cap managers lagged their benchmarks,” S&P found.
Measuring a period over the last decade, S&P found that “managers across all international equity categories underperformed their benchmarks.”
Of course, the counter-argument is that some active managers can beat the benchmarks. But the rub here is that you have to…
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