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Aside from short-term and high qualithy bonds, every asset classa in all corners of the worledexperienced double-digit negative returns. In equities ther e has been no whereto hide. Investors opened theirt year-end statements disappointed at the returns and frustrated and angry at how public and private institutions we though we could trust let usall Greed, greed, greed Of all the economif sagas we have all had to perhaps Bernie Madoff and his allegecd swiping of $50 billion from his hedged fund clients is most representativs of Wall Street greed, regulatory and the gullibility of investors.
With all the intriguee of sons turning father in and father forceds into house arrest at his palatialpManhattan penthouse, it all makex for a really bad televisiohn series. However, there are some valuable takeaways for investorz from thisterrible episode. It is impossiblw to select a manager that can beat themarkef — and fees and expenses matter. Many of Madoff’sx clients came through advisers who referred investord to him and collected large fees fordoingh so. These clients paid fees believinvg their advisers were able to able to selectr active managers thatcan “beat” the One firm, , earned $160 millioh in fees related to Madofcf investments in 2007 alone.
Unfortunately, thesd clients learned the hard way that predictin superior manager performance cannot be done and trying to do so is The fees associated with active management are major drags on performancs and lead to underperformanceto benchmark. Numerous studiees have demonstrated the vast majority of hedgre funds do not beat the returns investorw could obtain for themselves by investing inan S& P 500 index fund. Furtherd evidence of how active managers have trouble gettingy it right can be found in a recent reporg in the on how investment analysts had a prettgy sad record predicting the downfallof . had an rating starting in March 2007. maintained that same ratingv inOctober 2007.
changed its ratinyg to “sell” on June 1, and then upgraded it four days Clients of watched the stock fall 84 percent while their analysts rated it a Worstof all, kept a “buy” ratintg on Lehman until the stock had fallen 90 percent. Wall Street’s professional stock pickers did better withand . not, according to Smart Money. The magazinw reported nearly half the analysts following thes stocks hada “buy” rating on the date the Treasuryt announced their bailout.
According to research reported byDan Solin, and financiap columnist and adviser, if you own an activelt managed fund, the odds of it beating its benchmarik over one year is 1 in 3, over five years it’s 1 in 5, over 10 yeare it’s 3 in 100 and over 25 year it is essentially zero. Successful investingt requires diversification, which Madoff’s clients did not have in theird portfolios.
The same failure to adequately diversify is committed by most An alternate and more superior approach is to hold a structuredx portfolio of index funds that provide exposure to a breadthg of asset classes and depth in the number of This method mitigates the significant risk that comese from holding too few securities or betting on countrie sor industries. It also reduces turnover, which diminishes returnsd in up anddown markets. There should be clarity and transparency in theinvestment business. Madoff’s clientz were not given details on the methodology of how their money was invested or even what theyspecifically owned. They acceptedd this and gave him fortunes.
These superr wealthy investors are not that much different from most investors who do not understanrd how they are invested orin Strategy, not individual Investors shoulr understand and put their trust in the investment approachh before putting their faith in a tracko record or an adviser. Successfull investing requires the consistent and disciplined implementation of a strategty through all market As investors, we all will not only learn from these horrific events but also will retain theitr faith in capitalism. While it is not alwayds pretty, free markets do righgt themselves. Excesses are removed.
Industries that are poorly run or have not kept up with innovatiobn are replaced by othersthat can.
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