Do you have less than 10 years to retirement and are relying on picking the right shares to build your wealth?
STOP. You are wasting your time. Here is why: S&P Global run a scorecard called the “S&P Indices Versus Active Funds” (aka SPIVA). This scorecard tracks the performance of active managers in the USA, Europe and Australia against their benchmarks since 2002. The benchmark is a measure of what return the overall market has delivered and sets a level of return of which the manager must beat to justify their fees.
The results are shocking[1]: When we compare Australian equity active fund managers to the S&P/ASX 200 index (The top 200 companies on the Australian stock exchange) after one year, 52.60% underperformed the index AFTER fees. After three years 54.61% underperformed the index and after five years a whopping 70.96% underperformed the index.
Australian active bond fund managers fared worse compared to the S&P/ASX Australian Fixed Interest Index. 100% of managers underperformed the index after one year. 82.35% underperformed after three years and 86.27% underperformed after five years.
Australian international equity fund managers could not beat the S&P/ASX Developed Ex-Australia Large/Mid Cap Index (What a mouthful – meaning all the overseas developed country share markets outside of Australia). 67.31% of managers underperformed the index after one year. 85.15% underperformed after three years and 89.55% underperformed after five years.
The exception seems to be Australian equity mid-cap to small cap managers (Those managers who select stocks in companies that are ranked 1000 to 200 in market valuation). Compared to the S&P Mid Small Index, 55.21% underperformed the market after one year. 35.15% underperformed after three years and 29.17% underperformed after five years.
So what can we learn from the above? A passive approach using Exchange Traded Funds (ETF) will be much cheaper and achieve the same if not better result than most active managers over the long-term.
An ETF is simply a basket of underlying shares that mimic the index. For example, the iShares Core S&P/ASX 200 ETF invests directly in the top 200 companies on the Australian stock exchange. The management fee is 0.15%. The dividend yield is 7.29% (Or 8.67% after franking credits). In one transaction you own the top 200 companies on the Australia stock exchange and all the dividends and franking credits flow through to you. Your units in the ETF can be traded daily on the stock exchange like any other share. One bad return from one or several shares is unlikely to cause excessive volatility to your portfolio.
The average management fee for most Exchange Traded Funds is 0.07% to 0.45%. The average fee for most active managed funds is 1.2% to 2%.
So, if you are in your last two years of retirement, place most of your portfolio in ETF’s and stop worrying about picking individual stocks or fund managers.
This will enable you to focus your time and efforts on maximising your returns from something else you can control – your job!
The reduced stress factor from less portfolio volatility will also provide better sleep at night.
———
