A Guaranteed Way to Match the Market's Top-Performing Fund
If you (or your financial adviser) are spending all your time looking for the VERY BEST investment out there, you might be missing out on a sure thing.
Who doesn’t want the best? Of course, we all do. But sometimes our search for the very best investments can lead us astray if we lose sight of the big picture. While you’re sifting through a haystack worth of investments to find that golden needle, you just may be overlooking something even more important that ends up costing you a lot.
According to Morningstar, the top-performing large-cap U.S. equity fund over the last 15 years is the AMG Yacktman Focused Fund (Ticker: YAFFX). As of May 2017, the fund has had an annualized return of 11.06% over the last 15 years, beating the S&P 500 index by 3.5 percentage points.
Of course, the important question we all want the answer to is not who has been the best fund manager, but instead who will be the next best fund manager.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But picking the next great investment manager is hard, and it becomes more unlikely the longer you hold your investment. According to a recent study by S&P, 92% of large cap fund managers have underperformed the S&P 500 over the last 15 years.
The Hottest Fund Out There Can’t Beat This Strategy
Part of any adviser’s or investor’s job is to allocate their investments. As an adviser, I consider it a big part of my work to find the best funds for my clients. So, I wondered, what should I be doing to try and find the next AMG Yacktman?
Some may jump to finding the manager with the next hot quantitative algorithm, bury their nose in prospectuses and annual reports, or try to book golf outings with fund managers and CEOs. But I think I found a better, much easier, much more certain way of keeping up with AMG Yacktman, (or whoever the next top dog is): Save an extra $145 per month.
Consider an investor who, starting in 2002, saved $5,500 per year into AMG Yacktman’s fund (listed as Investment No. 2 in the chart below), and another investor who saved $7,250 per year (an extra $145.83 per month) into a basic, low-cost S&P 500 index fund (Investment No. 1 in the chart below). Who came out on top after 15 years?
The green line (Investment No. 3) in the chart above is the performance of the average large-cap U.S. equity fund, per the S&P study cited above.
For all the blood, sweat and tears that go into the hundreds of large-cap equity funds in an attempt to produce returns that best the S&P 500, isn’t it ironic that the effective long-term performance for a small investor in the top-performing large-cap fund can be matched by a small investor who is willing to save just a little bit more every month?
And yet, a majority of investors and financial advisers will devote countless hours and dollars in an attempt to find the few needles in Wall Street’s legendary haystack that will outperform.
Of course, there is a bigger point than just exactly how much money you need to save to match AMG Yacktman’s performance. The exact numbers will change if you consider different time horizons or amounts to be invested. You can play around with specific numbers with a compound interest calculator, like the one we used above here: http://www.hyllandcapital.com/blog/compound-interest-rate-calculator.
The Key Takeaway for Investors
The bigger point is that time spent focusing on elements of your financial plan that are within your control will yield much more certain, and very likely better, results for your portfolio.
What is more likely to positively affect the long-term value of your portfolio? Spending hours, days or even months evaluating fund managers, with a hope of picking the best one over the next 15 years? With history as our guide, we know you have only a small chance of succeeding at this option…
Or instead, should you focus your attention on your own finances and find a way to save a little extra every month?
Increasing your saving rate, no matter how much, has a 100% chance of increasing the value of your portfolio. No amount of investment research will yield the same certainty.
How that Might Apply to Your Financial Advice
As a financial adviser myself, is my time better spent evaluating fund managers? Or finding ways to save clients $145? My guess is I am much more likely to be successful finding $145 in savings in investment fees, taxes and spending rather than finding the most successful fund manager for the next 15 years.
If the next 15 years is anything like the last, the best use of your time will likely be spent doing the same.
Matt is the founder of Hylland Capital Management, a fee-only, virtually based financial planning and investment advisory firm designed for today's young professionals. Matt is a member of the XY Planning Network.
-
Use An iPhone? You May Be Hearing From A Class-Action Lawsuit Group
A handful of suits against the iPhone maker seek to crack down on everything from app store purchases to messaging.
By Keerthi Vedantam Published
-
Capital One/Discover: What's In Their Wallet For You?
Push back on Capital One's planned merger with Discover is growing with one group of consumer advocates calling for a public hearing.
By Keerthi Vedantam Published
-
Should You Enroll in Medicare if You Still Have a Job?
This question is being asked more than ever these days, so here’s what you can do when it comes to making Medicare decisions while you’re still working.
By Jae W. Oh Published
-
Three Big Ways That Life Insurance Can Be a Lifeline
Life insurance not only provides a safety net for loved ones and leaves behind a lasting legacy, but the cash value can also help during financial hardship.
By Steve Sugumele Published
-
Romance Scams That Target Older Adults Rising: What to Do
Here are some tips to help you avoid falling for a scam, especially when a scammer tries to prey on your affection.
By Patrick M. Simasko, J.D. Published
-
Lessons Learned From Britney Spears’ Financial Conservatorship
The pop star’s recent memoir reveals the toll her involuntary conservatorship took on her and spotlights the drawbacks of these legal arrangements.
By Stacy Francis, CFP®, CDFA®, CES™ Published
-
Four Things to Know About Managing a Loved One’s Finances
Figuring out when it’s time and knowing how to talk about it are just the start. You also need info about estate plans, insurance and health care decisions.
By Tony Drake, CFP®, Investment Advisor Representative Published
-
Three Tax-Smart Strategies for Real Estate Investing
Opportunity zones, Delaware statutory trusts and real estate income funds can help investors maximize gains and mitigate taxes.
By Dwight Kay Published
-
Can Language Apps Teach You to Speak a Foreign Language?
Your expectations might be too high if you think an online language platform can teach you to have a meaningful conversation in a foreign language.
By H. Dennis Beaver, Esq. Published
-
Avoid Surprises: Don’t Procrastinate on Your Taxes
You really should start thinking about next year’s taxes immediately after filing this year’s. Better tax efficiency could save you some serious dough.
By Jared Elson, Investment Adviser Published