Your Money: Investor, Beware

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By Jonathan E. Lederer, CFA

Do you know how much you pay annually for your investments? Not surprisingly, many investors cannot answer this question with certainty. They can’t really be blamed, because the investment industry focuses its marketing efforts on the promise of great performance; hence, costs are rarely mentioned.
     Lost in this marketing blitz is the fact that most investment managers fail to outperform the benchmark indexes to which their performance is compared. Since paying more for subpar performance is hard to justify, investors would be wise to pay close attention because, unlike the markets, costs are an important element they can control.   
     Logic says that professional investors should be able to generate value-added performance. However, empirical evidence shows quite the contrary. Analysis of the data compiled by Standard and Poor’s Index Versus Active group, which tracks mutual funds quarterly to determine how many outperform the benchmark indexes against which their performance is measured, one finds that over the past five years:  

• Only 28 percent of U.S. small-cap equity funds outperformed the S&P 600 Small-Cap Index  
• Only 19 percent of mid-cap funds outperformed the S&P 400 Mid-Cap Index  
• Only 35 percent of large-cap funds outperformed the S&P 500

Continued...

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