dare-to-compare

Andrew Hallam
12.02.24

Dare To Compare Your Investment Results With Your Colleagues and Friends?
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Check your Facebook and Instagram. One of your friends posted a blissful shot with her boyfriend in the Maldives. A colleague just announced his promotion. Your neighbour posts how much he loves his wife, giving her a birthday greeting from a mountaintop restaurant…as if she weren’t there.

Life can be tough. But social media often only shows the glory. Many blissful relationships on Facebook aren’t as loving as they appear.  Many proud professionals on LinkedIn wish they could quit.    

That isn’t the case for everyone. But comparing other people’s highlights to your day-to-day living can make you feel like a chump--if you lose perspective. The same warped comparisons can apply to your investments.

For example, your HR director might say, “I made 154 percent on Bitcoin last year. It’s now priced at $42,000.” That could be true.

But if she paid $64,000 for Bitcoin in 2021, she might not share that part.  

Others might claim bonanzas on a few hot stocks this year.  They won’t confess to the time they lost their shirts, pants and underwear.

Truth serums (so far) only exist in sci-fi movies. That’s why you’ll never know how your investments stack up, compared to other people. But through the ups and downs of multiple market years, most hedge fund managers will thump your friends who speculate on their own.

“Why should I care about hedge funds,” you ask?

I’ll get to that in a moment.

For now, recognize that your company’s director of marketing (who picks stocks on the side) will likely lose to the typical hedge fund manager over the next 10-30 years. Your HR director (the company’s crypto fan), will likely do the same.  

Unlike your colleagues and friends, hedge fund managers don’t invest part-time. They’re trained to find gems and make money for investors. They buy stocks, crypto, bonds, real estate, art and other “alternative investments.” They can “short” stocks if they think the market is heading for the sewer. They can profit from that bet if stocks get flushed.

Professional speculators, as a group, beat amateur speculators.  That’s why the typical hedge fund manager will likely beat your friends and colleagues.

Now here’s the cool part:

You can thrash the performance of most hedge fund managers over the next 10, 20 or 30 years. All you need is a diversified portfolio of index funds and Zen-like calm. Add money whenever you have it. Never speculate. Always stay the course.

Others will boast of big profits, from time to time. But there’s typically a flipside to those big gains. That applies to amateurs and pros, alike.

For example, a specific hedge fund manager might make 20 percent per year for several years in a row, before their stomach ends up in their mouth. If they lose 70 percent after their big run, for example, they would need to gain 233 percent to get back to even.

It’s ironic, but professional investors that chase hot opportunities typically earn weak returns, over the long haul.  And investing is a long haul game.  

Let’s start with 2023. According to the HFRX composite, global hedge funds averaged 6.9 percent that year.

With a diversified portfolio of index funds, you would have thumped that return. But let’s move further back. Below, I’ve shown the returns of global hedge funds from 2003-2023.  I also compared them to index portfolios representing various levels of risk.

As shown below, $10,000 invested in hedge funds between 2003 and 2023 would have grown to $12,559.

Meanwhile, an extremely conservative portfolio of index funds (50 percent global stocks, 50 percent global bonds) turned the same $10,000 into $37,728.

A portfolio allocated 80 percent to global stocks and 20 percent to global bonds ran circles around the hedgers. It turned $10,000 into $51,616.

“But wait!” you say. “Hedge funds charge high fees.  If their fees were zero, would they have earned great returns?”

Ah…no.

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Hedge funds typically charge investors 2 percent per year, plus 20 percent of any profits. That means, between 2003 and 2023, hedge fund investors paid fees of 2.8 percent per year.

If hedge fund managers worked for free, their investors would have averaged 3.9 percent per year, instead of the 1.1 percent below.  

You would have thumped that with index funds.  

No, hedge fund managers are not stupid. They are, in fact, more financially astute than most of the people you know.

That’s why you shouldn’t speculate.

Over your lifetime, you’ll have better odds of beating up two-time heavyweight champion, Anthony Joshua, than you’ll have beating a portfolio of index funds.

When people talk about money, it’s like social media posts. They rarely share the bumps and bruises.

 

Global Hedge Fund Returns vs. Index Fund Portfolios

2003-2023

Year

Global Hedge Funds

100% Global Stock Index

80% Global Stock Index

20% Global Bonds

70% Global Stock Index

30% Global Bonds

60% Global Stock Index

40% Global Bonds

50% Global Stock Index

50% Global Bonds

2003

13.4%

35.28%

 

32.55%

30.99%

29.53%

28.16%

2004

2.7%

16.13%

14.83%

14.15%

13.46%

12.85%

2005

2.7%

10.19%

7.26%

5.75%

4.24%

2.78%

2006

9.3%

20.44%

17.98%

16.70%

15.32%

14.25%

2007

4.2%

9.91%

9.69%

9.39%

9.18%

9.07%

2008

-23.3%

-40.66%

-34.33%

-31.12%

-27.92%

-24.79%

2009

13.4%

32.17%

30.26%

29.26%

28.27%

27.35%

2010

5.2%

13.99%

12.71%

12.10%

11.49%

10.78%

2011

-8.8%

-6.64%

-4.67%

-3.62%

-2.56%

-1.65%

2012

3.51%

16.86%

15.31%

14.11%

13.20%

12.30%

2013

6.72%

24.45%

18.82%

16.18%

13.49%

10.61%

2014

-0.58%

4.3%

3.38%

3.0%

2.63%

2.08%

2015

-3.64%

-2.20%

-2.85%

-3.15%

-3.45%

-3.80%

2016

0.86%

8.53%

7.45%

6.95%

6.36%

5.88%

2017

0.73%

23.73%

20.73%

19.19%

17.65%

16.18%

2018

-6.7%

-9.87%

-8.49%

-7.76%

-7.12%

-6.38%

2019

8.62%

26.02%

22.08%

20.16%

18.24%

16.22%

2020

2.45%

16.01%

15.40%

15.15%

14.90%

14.55%

2021

3.65%

17.31%

12.73%

10.53%

8.33%

5.95%

2022

-10.67%

-18.26%

-18.07%

-18.01%

-17.94%

-17.24%

2023

6.9%

20.64%

17.51%

15.99%

14.48%

12.84%

 

 

 

 

 

 

 

Compound Annual Average

1.1%

9.04%

8.13%

7.60%

7.09%

6.53%

 

 

 

 

 

 

 

Growth of $10,000

$12,559

$61,601

$51,614

$46,600

$42,163

$37,728

Sources:

For index portfolios, I used portfoliovisualizer.com to track asset class performances. I also deducted 0.3 percent per year for fund fees and tracking error.

For the hedge funds, I used the HFRX Indices Performance Tables.