ITA Wealth Management

Step 4 from “The Big Investment Lie” states – “Professional investors as a class do not outperform the market.”  Note how carefully this step is stated.  “As a class” is an important addition to the statement as we know there will always be some professionals who will outperform the market.  We also know those that do will likely not repeat it the following year.  In fact, mutual funds that have not shown a down quarter for many years are now under investigation since the probability of this happening is close to nil.  No down quarters is a red flag just as it was for Bernie Madoff.

“Big Lie” author, Michael Edesess elaborates on Step #4 this way.  “Virtually all reputable statistical studies, time after time after time, show that on average, the performance of professional investors as a class is no better–in fact, usually a little worse–than the market average.  In short, the statistical evidence shows that professional investors, as a class, add nothing for their fees.”

The market is generally defined as the S&P 500.  I prefer to define market to be the total market rather than 500 stocks.  This is why we use the VTSMX as our benchmark in the portfolios tracked on the Premium Content side of this blog.

To find references for this under performance contention, I highly recommend readers purchase Mark Hebner’s amazing investment book, “Index Funds: The 12-Step Program for Active Investors.”  If you are not sure about my recommendation, first check out Hebner’s web site at this URL and you will see why I am so high on this book.

If professionals do not outperform the market, what is the small investor to do?  The simple approach is to purchase three or four broad index funds that will cover the investing world.  Suggestions can be found on this blog.  For someone who wants absolutely nothing to do with the investing world, then seek out a low-fee investment advisor.  Make sure they use index funds as the core for building the portfolio.

The philosophy of this blog is to use index instruments as the primary portfolio building blocks.  Based on Fama-French research, we will tilt a portfolio slightly toward value and the smaller cap stocks.  This skewing of the asset classes is to squeeze out a percentage or two above the VTSMX benchmark.  Have we seen any success to this approach?  Our portfolios that have been operating for eight or more years show this inclination.  Even so, a ten to fifteen-year record is insufficient time to come to a definitive conclusion.  Data for seven portfolios is available to Premium subscribers.

For the last several months, I’ve been using a new investment tool, Quantext Portfolio Planner (QPP), to analyze portfolios for potential return, risk reduction, and portfolio diversification.  Premium Content users receive free portfolio analysis using the QPP tool.  All this requires is the ticker symbol (limit of 40 per portfolio) and the percentage each ticker occupies in the portfolio.  No dollar amounts are involved so nothing personal is divulged.  I do request the opportunity to post a short “movie” of the analysis so other Premium users learn from the process.  The source of the portfolio is never divulged unless released by the owner.

Hint:  If at any time you run across a term you don’t understand, do a search on this blog and you are likely to come up with an explanation.  Note that a search for a word or term included in any post will also bring up that same post so you need to read through other pages to gain additional understanding.

Lowell Herr

Photograph: Portland peace marcher.

Premium subscription available for $6.99 per month.