With stock indexes making news highs for the better part of of the past four years (with the exception of two "v" shaped corrections in 2018 and 2020, respectively) investors are increasingly wondering whether or not investment managers are worth their fees.
Looking back over the past twenty years, the answer has largely depended on timing. Looking at the Nasdaq for instance, the period from October 1998 through March 2000 saw the index increase more than 230%. 230% in 17 months, that's nearly 14% per month! If someone was offered that kind of return on an investment upfront they might not be blamed for asking the question 'who do I have to kill' to get that type of return. However, by the summer of 2002, the Nasdaq had given up all of the gains from the dotcom boom. The boom effectively went bust.
In a best case scenario, anyone who invested in a Nasdaq ETF from January of 1999 through February of 2001 would have had to wait until 2007 just to break even. In a worst case scenario, if they invested at the top, they would have had to wait 15 years to break even. The figures are similar, but not as dramatic, when looking at investing in the S&P 500 over similar periods.
Whether or not an investor would have made out better, for instance, from 1998 through 2015 investing on their own or with an investment advisor largely has to do with the advisor that they choose. If the investor chose an advisor that was focused on growing their clients' nest egg/investment portfolio with a responsible and risk adjusted strategy, the advisor is likely to have significantly outperformed the indexes by having invested in a combination of income generating securities and adjusting exposure to equity markets based on the attractiveness of company/sector/economic prospects measured against valuations and available alternatives.
The past four years have seen relatively easy returns, largely fueled by increasing equity valuations (34% higher), a $5.4 trillion federal government deficit since 2017 (far outpacing GDP growth) that increased the national debt nearly 25% and a Federal Reserve that has doubled the size of its balance sheet to $7 trillion. Corporate earnings, meanwhile, are down since 2016.
One could make the argument that because they were healthy for an extended period of time with relatively little maintenance that they do not need a doctor to screen them regularly or run diagnostic tests recommended for certain populations and age groups. Would not going to a doctor result in better health? If I was going on a long road trip, would I rather have a mechanic look at the car and tell me it was ok or trust that because the car had been operating well up to that point that it will continue to run well?
If you truly believe you have a firm grasp on all of the dynamics of the market and the disparate dynamics within your portfolio at all times, maybe it is worth taking the chance of managing your own money. But if you believe that a well trained professional is better suited to understand the constantly changing dynamics in the global economy, within sectors and at individual companies, the decision comes down to who you pick to manage your money. That is an issue I will take up in the next article.
Thanks for reading and please contact me with any investment management and/or financial planning questions at paul@nobleadvisors.net.