TIPS FOR NEW INVESTORS FROM MORGAN STANLEY
Before retiring, Morgan Stanley investment strategist Gerard Minack sent out a two-page farewell letter to his clients that contained three extremely important investment tips.
• Don't try to pick stocks
• Don't try to find the best time to buy or sell stocks (market timing)
• Just invest in cheap and tax-friendly index funds
Any other investment strategy is ineffective, according to Minak. The expert points out to novice investors that in an average statistical year, 60% of actively managed funds do not perform as expected. This means that an investor only has a 40% chance of picking a fund that can outperform the market. It is more likely that the choice of fund will be wrong.
Morgan Stanley investment strategist advises how to raise capital Minak then notes that, looking at the investment strategy of funds in the longer term, over the past three years (until 2012), almost 87% of funds have underperformed the market. This means that if you plan to hold your investment for three years or more, you have a 1 in 9 chance of choosing a fund that can outperform the market. This is a very small probability, and the situation continues to deteriorate.
It's even worse if, like most people, in addition to looking for a fund that will outperform the market, you're also trying to catch the most favorable moment in the market (primarily a rise). As a rule, you cannot catch the right moment and fall into the most unfortunate segment. As a result, you leave the market when you need to increase investment and invest money when you should leave.
If you think that by increasing your investment in hedge funds, rather than cheaper mutual funds, you increase your chances of beating the market, you are wrong. Everything is exactly the opposite - your chances are sharply reduced. Why? The main reason most funds (mutuals and hedges) underperform is not poor stock selection, but service fees.
On a gross basis, before expenses and fees, roughly half of the funds outperform the market and the other half underperform. (This is because the funds themselves are a market.) Once you subtract the costs and service fees in both groups, the results become much worse. In addition, hedge funds tend to charge higher fees than mutual funds.
Thus, the tactic of choosing a fund and waiting for the best moment to buy or sell a stock is a terrible idea.
And now the good news. If instead you just invest in cheap index funds, your chances will increase to 90% in the long run. This is because, unlike actively managed funds, index funds have very low costs and service fees. They monitor the market while actively managed fund groups underperform due to high costs and fees.