In the investing world, we usually refer to professional money managers as the “smart money.” However, recent reports show that trusting your hard-earned capital to mutual fund managers is not the wisest move. In 2012, a whopping 65% of large cap mutual funds failed to outperform the S&P 500 Index’s return of 16%!
Another section of “smart money” also disappointed. Hedge funds were nearly as bad as the mutual funds. In the first nine months of 2012, 635 hedge funds were forced to close due to poor performance. This was an 8.5% increase over 2011. When you factor in the fees that are charged by these funds, it is a wonder why anyone would invest this way.
Index funds are mutual funds that are designed to mimic the movements of an underlying index. They usually have lower costs involved and would have been a better choice for investors last year. In 2007, Warren Buffet said that most investors would be better off investing in index funds rather than trying to pick individual stocks. History has shown that this is true.
So why did the fund managers perform so badly as a group? The major factor seems to be a failure to recognize changes in sector rotation and timing in market moves. In my May 24th, 2011, article called “Turning Point’” I discussed the importance of sector rotation as a timing tool in the markets. Looking at the first quarter of 2012, we can see the start of a healthy bullish run with financials, consumer discretionary, and technology leading the way.
But where the funds missed out was the flight to safety in the second quarter. If they were watching, they would have been able to position themselves better as leads in consumer staples, healthcare, and utilities signaled a market turndown.
The third quarter saw risk appetite grow as money flowed back into the growth sectors. Managers who were bit by the spring bear run were slow to return to those sectors and missed out.
Finally, we saw continuation of Quantitative Easing Policy by the Federal Reserve and the financial sector boomed as a result. October was weak but the markets rose to yield yearly gains in November and December.
In the Professional Trader Course, we teach skills that allow you as an individual to time the market turns and take advantage of these changing environments. Online Trading Academy also teaches Pro Active Investing. This is a perfect way for investors to learn how to manage their retirement funds in a manner that offers steady, safe growth. This is the best way to join the ranks of the truly “Smart Money.”