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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
-
Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs InSome brokerage firms are promoting 'event contracts,' which are essentially yes-or-no wagers, blurring the lines between investing and gambling.
