Streetwise for Sunday, September 19, 2021

Here are some sage words from this week's Barron's (actually one of my favorite publications), "S&P 500 index funds will tumble by Christmas, one Wall Street strategist predicts. Not necessarily, says another-but they'll lose money over the next decade."

Yes, as Barron's was quick to point out, the S&P 500 index has returned 376% over the past decade, or close to 17% a year, compounded. Among active managers tasked with beating the index, four out of five failed during the 10 years through 2020.

Furthermore, according to followers of the late John Bogle, the explanation is simple: Stock-picking is futile. But if that is true then the typical active manager should do no better or worse than indexes on underlying stock performance and underperform only to the extent, he or she charges extra fees.

However, as Barron's points out, they have trailed over 10 years by an average of 2.5% a year. Theoretically performance at that level should not exist.

Let me state at the onset, as I have said many times before, it is not possible to predict what the financial markets are going to do in the next hour, much less over a period of weeks, months, or years.

And there is a major drawback to using the S&P 500 index as a benchmark because five companies, Apple, Microsoft, Alphabet, Amazon, and Facebook represent one-quarter of the S&P 500's market value. As they go, the S&P 500 may not be too far behind.

Fear, hope, and greed are often driving forces on Wall Street and speculators play off those emotions to book a quick profit. However, you are an investor, not a speculator.

As such, your investment interest should lie solely with how a series of individual stocks are projected to perform over a 12-to-36-month period. It is company performance and not market euphoria or lack thereof, which should be driving your investment strategy.

There is another problem that has reared its ugly head of late. The speculation side of investing has taken on a new persona. Younger-than-average would be investors have found themselves in a situation that is tragic and distorting to the true meaning of investing.

It does not have to be that way. Rather than speculate, consider that you are obligating yourself to undertake the necessary analysis of a corporation's financials and operating strategy. There are no shortcuts to achieving excellence in any pursuit and using index funds is no exception.

The often-touted index funds or exchange traded funds (ETFs) as they are often called, will never enable you to achieve the success that is possible from investing in individual companies.

Now, before you become too intoxicated with unbridled enthusiasm, please remember that there have been great times, good times, and some not-so-good times when it comes to investing. Nonetheless, after more than 50 years, I have reached the conclusion that it is more difficult to lose money investing in stocks than it is to make money.

Nonetheless, investors and investment advisors often take what they think is an effortless short-cut via index funds. To quote an old Wall Street adage, you cannot beat the market by buying the market.

Yes, in the long run the markets will move ahead and therefore so will index funds...after fees of course. Furthermore, index funds are a step, albeit a small one, above buying mutual funds, an investment avenue fraught with higher fees, higher risk and less return than buying individual stocks.

Virtually anyone can invest successfully. There are literally dozens of well-known, high-quality blue-chip companies with a long history of earnings and dividend growth with which anyone can build a solid portfolio using a deep discount brokerage house. No, you will not become another Warren Buffett next week, but you will enjoy steady investment gains over time.

Once you have a strong foundation in place, you can move on to some high-quality small cap companies that will enable you to achieve higher returns in a somewhat shorter time, keeping in mind that risk and return go together.

Small cap companies, those companies whose market capitalization (number of outstanding shares multiplied by the share price) is less than a billion dollars, are always popular because they are the race cars of Wall Street. They can shift gears and change direction with a minimal effort as they find holes in the pack that others have not seen or cannot fit into.

Nonetheless, any small cap strategy is certainly not without risk. Research data for is less abundant and the punishment for not doing your homework can be quite severe.

Lauren Rudd is a Managing Director with Raymond James & Associates, Inc., member NYSE/SIPC. Contact him at 941-706-3449 or Lauren.Rudd@RaymondJames.com. All opinions are solely those of the author. This material is provided for informational purposes only, is not a recommendation and should not be relied on for investment decisions. Investing involves risk and you may incur a loss regardless of strategy selected. Past performance is no guarantee of future results.