Smart money turns out to be stupid

Bearish Bets Backfire for Big-Name Hedge Funds

That’s a headline from The Wall Street Journal, posted and published today, just a few days before Christmas. Well, it doesn’t feel too much like Christmas for many managing or investing in hedge funds this year. According to Laurence Fletcher, a reporter for The Wall Street Journal, some of them bet entirely the wrong way… “Some of the biggest names in the hedge-fund industry began 2016 betting stocks would tank. It turned out to be a terrible call.” Oops!

And I’m sure we all remember what Jack Bogle and Warren Buffett have been stating for pretty much a lifetime: consistently invest in the broader market, passively. That is, no stock picking. No trying to time the market. No paying financial advisors who charge you big fees or commissions for not beating the market. Nope, none of this.

Why? Well, for instance, many hedge funds are down double digits this year. Meanwhile, the S&P 500 is up over 10%. That is one massive chasm of a difference. What’s insane is that investors in hedge funds are still paying for the privilege of doing so.

But let’s take a less extreme example. Managed funds cost more to operate because, well, they’ve got people managing the funds and they want to get paid. And the thing is they’re really not that good. They consistently underperform the S&P 500. Likewise, these funds usually charge more than 1% and can go as high as 3%. Meanwhile, SPY, an ETF that matches the S&P 500 Index, charges just .09%! Do the math. Pay less than one-tenth of one-percent or pay well over ten times that amount and for an inferior return on your money.

1%, and remember most managed funds charge much more than this, is a big deal. Let’s say you have $100,000 invested. In a managed fund, you really have, at most, just $99,000. With SPY, you have $99,910. The net difference for just one year is a whopping $910! But it’s actually worse than that because this is also $910 fewer dollars for which to receive a return. But it gets worse yet, much worse. Think what that constant drain and lack of return work out to over 5, 10 or 20 years. Ugly. So avoid ugly. Embrace those low-cost funds that mirror indices.

 

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