Most people (passive and active investors) don’t get average market returns. The market averages, the S & P 500s of the world, have actually achieved a lot better than average market returns.
Many passive investors achieve below average returns because they are over-diversified, receive bad advice, and pay high fees to financial advisors. Keep in mind, many financial advisors are not in the performance business. They are in the business of providing sound financial planning services. It is not something that you cannot do by yourself, but let’s face it – most people simply lack the knowledge, the desire or the time to do it. The question is how much is a good financial advisor worth? One percent of your capital every single year? On a 500k, this is 5k a year. There should not be a big difference between allocating 500k and 5 million to index funds. Why are financial advisors not charging a flat fee after a certain minimum capital requirement is met?
Most hedge funds are not able to achieve average market returns over a long period of time after fees. 2 and 20 or even 1 and 15 can be hard to overcome if you manage a substantial amount of capital. If it is practically impossible, why should investors even bother? Considering the much bigger risk that you are taking, the leap of hope, the tax implications, hedge funds and managed accounts’ benchmarks should be a lot higher than S & P 500, the Russell 2000, the Vanguard Emerging Markets Index Fund, the S & P Global 1200, etc. So don’t gloat if your fund managed to beat the market by 200 basis points last year. You need to deliver a lot more to justify the risk people are taking with you. How much more? I’d say 1.5X their usual benchmark. The worse case scenario should be average market returns after fees with a smaller drawdown than the market averages.
What about active traders? We should take into account not only our return on capital but also our return on time and efforts spent. The time we devote to trading is a time we cannot use to acquire other skills. Therefore, we should require from ourselves a lot bigger than market average returns. 2x, 3x, 4X than what a market average can do for us. If we cannot achieve them and statistics show the vast majority of traders and investors cannot, there are better options for our time, intellect and money.
The way I see it, you have the following options:
a) Dollar-cost average in a cheap, well-diversified index fund and never read another financial article or watch financial TV.
b) Find a reasonably priced financial advisor who can earn his keep by providing a personalised financial plan. This is a good option if you are already rich and your goal is to remain rich.
c) Find smaller money managers with a great track record after fees. It is not impossible. I personally know half a dozen smaller managed account managers that have done a good job.
d) You can pay for education, strategic direction and ideas. There are quite a few amazing trading and investing services out there that more than pay for themselves. You save time, gain skill, and improve your odds of achieving substantial returns by spending very little money.