Want To Beat The Market? Why Your Advisor Probably Won’t (and You Shouldn’t Expect To)
Passive investing has gained a lot of traction in recent years for its ease and “set it and forget it” mentality. The same applies to paying a fee to your financial advisor to manage your assets and portfolios. Fee-based advisors collect based on the assets they have under management for each client. This typically ranges from 1%-3%. You pay your advisor a fee, and they do their best to get you returns that you’re satisfied with.
Beating the market is typically the goal for most investors. This means a rate of return that exceeds the S&P 500 index.
However, following the S&P 500 can be misleading. When you follow the index can have significant impact on what kind of returns you see. This could largely be why so many new inventors entered the market in 2020 and 2021. In March 2021 alone, the index returned over 53.4%. You could enter a very “hot” market like the one we are experiencing right now, pay a premium for both services and equities prices, but then experience a sharp downturn. Context is key; exactly 12 months ago in March of 2020, the index was -8%.
The market has experienced a historically high year, giving returns all around that most investors would ordinarily not expect. This is important, specifically now when having conversations with financial advisors.
Financial advisors are sales people just like any other financial professional; their job is to sell you their service. In a year with 20%, 30% and now 50% returns, it’s relatively easy to convince people to invest. It’s also just as easy to overpromise returns when there still exists a likelihood of them climbing higher.
The golden rule to remember is that the S&P 500 has averaged an inflation-adjusted rate of return of 6%-7% over the last 50 years. That’s it. This accounts for crazy high periods like we are experiencing now, recessions such as the one 2008, coronavirus shutdowns in 2020, dot-com busts, trickle-down economics, ad booms and bubbles of all kinds.
Expecting your advisor to beat the market really depends on what you want your money to do, and the answers are simple. If you want to invest some extra money in the market for 5-7 years and feel like it was “worth it,” then you’re likely chasing a higher rate of return than the index. If this is the case, you will need to invest in risky stocks, withstand and expect volatility, and be willing to lose the money you have invested.
If you want to beat the market overall, or stay within striking distance, it is better to have realistic expectations. You should be prepared to not even touch your money for at least 7 years, with a longer time horizon being even more favorable. The longer you are in the market, the better chance you have of receiving an overall rate of return around 7% or 8%. If an advisor is promising you much beyond that, it’s best to stay away. Unless you are willing to go along with the risk, there is not much an advisor can do to both beat the market and keep your principal safe.
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Last updated: June 21, 2021