FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.
Three Reasons Investors Should Stop Comparing Their Returns To Their Peers' (CFA Institute)
In the past year, stocks had stellar returns. But many investors have missed out on this. What's more, a study titled 'Investor Happiness' published earlier this year pointed out that when markets went on a tear, investors were actually disappointed with higher portfolio returns, while in down markets they were more accepting of lower returns.
"These findings support the notion that relative returns (your investment returns relative to your peers or the market) likely play an underestimated role in how satisfied you are with the progress of your investments," writes David Allison at CFA Institute. Allison identifies three reasons why investors should not compare returns with their peers' returns. Here they are verbatim.
1. "You are not comparing apples with apples. Everyone has unique investment objectives, constraints, and levels of risk tolerance. This makes it nearly impossible to fairly compare investment returns from one individual investor to another."
2. "Your peers likely are not calculating their investment returns correctly. Consider a study by Markus Glaser and Martin Weber in which they surveyed 215 online investors and found very little correlation between their self-estimated investment returns and their actual investment returns."
3. "You are probably not hearing the whole story. For example, your friend may claim to have “smoked the S&P 500” in his online trading account, but he may have failed to also mention the much larger 401(k) plan that he liquidated back in 2008 that remains invested in cash."
Why Investors Should Stop Chasing Highly Rated Funds (Vanguard)
Investors tend to turn to funds with high performance ratings without understanding whether this is right for them. Vanguard points out that this is a mistake "because these highly rated funds have tended to underperform immediately after receiving the high marks."
"Most often, investors are led into such imbalances by common, avoidable mistakes such as performance-chasing, market-timing, or reacting to market “noise."
North Dakota's Millionaires Need Wealth Advisors (The Wall Street Journal)
North Dakota's oil boom has helped create millionaire households and that in turn has created a market for financial advisors, reports Matthias Rieker at the WSJ. From Rieker, "As of March 31, 1,589 investment advisory representatives and 72,803 stock brokers were registered to do business in the state--an increase of almost 40% for both groups over the last five years, says Karen Tyler, the North Dakota securities commissioner." For now advisors are largely "parachuting" over but firms are struggling to find advisors to move there.
SIFMA CEO Doesn't Think Market Is Rigged Against Retail Investors (FA Mag)
In his new book "Flash Boys," Michael Lewis writes that high frequency traders are rigging the market. This has raised concerns for retail investors. Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association (SIFMA) however says he doesn't think the market is rigged, reports Ted Knutson at FA Mag. Speaking at a policy conference in Washington D.C. he said retail investors now get “tremendously better” execution than they did a decade ago.
A Brief History Of The US Mutual Fund Industry In One Chart (Morningstar)
John Rekenthaler at Morningstar has created a chart that shows "the varying fortunes of fund types." To communicate this, he took the four most prominent mutual funds over the past 15 years and changed the names to their description to reflect fund types.
"In 1998, the "Star Stock Manager Fund reigned supreme, boasting more assets than the other three funds combined. …Star Stock Manager Fund was surpassed in assets in late 2003 by Star Bond Manager Fund, and then shortly thereafter by Group Active Stock Management Fund, which became the world's largest mutual fund for the next four years, until dethroned by the 2008 stock crash. …Today's largest fund, Index Stock Fund, represents a trend long in the making. Index funds have gained market share steadily for 25 years now."
