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.
-
Ten Cheapest Places to Live in TexasProperty Tax Looking for a cheap place to live in Texas? Look no further. These counties have the lowest property tax bills in the Lone Star State.
-
AI Is Missing the Wisdom of Older Adults: What It Means for YouAI will increasingly affect your healthcare and finances, but young workers are primarily designing the systems and getting most of the jobs.
-
The Three C's to Financial Success: A Financial Planner's Guide to Build WealthConsistency, commitment and confidence in your chosen strategy are more critical to your financial success than finding the 'perfect' financial plan.
-
A Financial Adviser's Guide to Solving Your Retirement Puzzle: Five Key PiecesIf retirement's a puzzle you're struggling with, try answering these five questions. The answers will guide you toward a solution.
-
You're Close to Retirement and Cashed Out: How Do You Get Back In?If you've been scared into an all-cash position, it's wise to consider reinvesting your money in the markets. Here's how a financial planner recommends you can get back in the saddle.
-
After the Disaster: An Expert's Guide to Deciding Whether to Rebuild or RelocateHomeowners hit by disaster must weigh the emotional desire to rebuild against the financial realities of insurance coverage, unexpected costs and future risk.
-
A Financial Expert's Tips for Lending Money to Family and FriendsWhat starts as a lifeline can turn into a minefield if the borrower ghosts the lender. Following these three steps can help you avoid family feuds over funds.
-
What the HECM? Combine It With a QLAC and See What HappensCombining a reverse mortgage known as a HECM with a QLAC (qualifying longevity annuity contract) can provide longevity protection, tax savings and liquidity for unplanned expenses.
-
721 UPREIT DSTs: Real Estate Investing Expert Explores the Hidden RisksPotential investors need to understand the crucial distinction between a REIT's option to buy a Delaware statutory trust's property and its obligation.
-
I'm an Insurance Expert: Yes, You Need Life Insurance Even if the Kids Are Grown and the House Is Paid OffLife insurance isn't about you. It's about providing for loved ones and covering expenses after you're gone. Here are five key reasons to have it.
