THE CASE FOR MANAGED MONEY
In this day and age of independence, people are becoming more and more self-reliant, and more and more ads on television are telling you that you can trade stocks yourself and cut out professional advice. Let's spend a moment to look at the figures. I have always contended in this space and on our Saturday morning call-in show, that 90-95% of the people I come in contact with would be better off having their money professionally managed. You can get that professional management relatively inexpensively through mutual funds or variable deferred annuities. If you get the proper guidance from a qualified or full-service broker, you get to pick from some of the world's best money managers and you can let them make the choices.
'But, ' you say, 'that's too slow and boring. I want to find the next Microsoft or Intel.' Well, good luck. The facts and figures tend to say you won't be successful.
Certainly, we can all agree that the decade just ended was a very successful one. In the entire decade of the 90s, the Dow Industrials averaged 18.4%, while the S&P 500 averaged 18.2%. One would suspect that with those kind of statistics for an entire decade, it would be fairly easy to step in, manage your own money, and produce significantly high rates of return. The task looks even easier when you look at the last five years, i.e., 1995 through 1999. Through that period of time, the Dow averaged 27%, while the rate of return for the S&P 500 was a whopping 28.5%. The simple conclusion might be to throw a dart anywhere at the stock page and you've got a winner. Of course, nothing could be further from the truth. When you're picking from this delectable list of stocks that are going to "all go up," are you going to pick Boeing, International Paper and Phillip Morris? Or in the last decade, had you picked General Motors, Home Depot, Intel, Microsoft or Wal-Mart? Between those choices, the rates of return would have been dramatically different.
As an example, even last year, when the S&P 500 gained about 21%, the fact is, out of the 500 stocks that comprise the S&P 500, about half of them, 249 to be specific, actually declined. Forty of the 500 companies had a one-year rate of return of 100%, and one stock, QualCom, actually returned about 2,600%. The question is, would you have been in the right place?
It does make a difference. In the previous outline, just removing one stock, QualCom, from the 500 stocks would have lowered the overall rate of return of the S&P 500 from 21% down to 15.6%.
Again, last year, a year that was wonderful for stocks, the facts show that of the 6,242 stocks tracked by Morningstar, 54% declined. Furthermore, 58% generated a rate of return below 5%, and 61% had an annual rate of return below 10%.
Obviously, picking specific stocks does give you a chance to hit that grand slam homerun, and it truly is probably more fun than allowing professionals, via mutual funds and their sub-accounts, or a variable deferred annuity, to manage your money for you. But the risks of losing money are far greater as an individual investor. The question at the bottom line really has to read "Are you investing for fun, or seriously for your future retirement or college education for your children or grandchildren?" If you're investing for fun, then go ahead and invest a small portion of your available money. If you are investing serious money that had better be there three, five or ten years from now, a significant case can be made for letting professionals do the job. Over the last three years, from 1997 to 1999 of the more than 5,300 stocks in existence for the full three year period, 46% of them had negative annualized rates of return. By the same token, for the same period of time, of the almost 1,900 equity mutual funds, only 2.5% of them declined.
As always, the choice is yours. It's your retirement, your money, and you have to make the choice. But I think there are compelling reasons why the average person needs professional help.
(Tom Butenhoff is a First Vice President with J. E.
Liss & Company in Milwaukee. The views are his and not necessarily
those of Liss Financial Services or the Job Connection/Hiring
Network.)