Client login

How hard is it to outperform the stock market and what are the risks of trying?

As a client of MASECO you would have heard us talking about the equity market return premium, which states that the equity markets have outperformed the risk-free rate of return (for USD benchmarked investors: one month treasury bills) over time by a significant margin. The graph below is a nice long term illustration of this:

Source: https://www.investmentsillustrated.com/clients/crsp/bp/graph.html

At MASECO we also talk a lot about how important diversification between securities, markets and asset classes when trying to achieve higher risk adjusted returns.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Dimensional Fund Advisors

Prof. Hendrik Bessembinder published one of my favourite papers in the Journal of Financial Economics called ‘Do stocks outperform treasury bills?’ which contained the following key findings (although I encourage reading the whole paper):

  • 58% of common stocks underperformed 1-month US treasury bills over their lifetime (Centre For Research on Security Prices (CRSP))
  • The entire outperformance of the U.S stock market is attributable to the best performing 4% of listed stocks, the other 96% collectively performed in line with US treasury bills

Source: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

This illustrates just how difficult it is to outperform the general market through stock picking as one would have to find and stick with the few golden needles in the haystack. The fact that most stocks do not carry a positive risk premium (i.e. 58% underperform the risk-free rate) and that the single most frequent outcome over a stock’s full lifetime is a loss of 100% also tells us that stockpicking can be more akin to gambling than investing as the odds are stacked against the investor.

It is no wonder then that the vast majority of actively managed funds fail to beat their benchmarks and that those that outperform over one period, mostly fail to repeat their success over the next period. Dimensional Fund Managers undertake a large study each year where they look at exactly this and it is well worth a look: https://eu.dimensional.com/en/perspectives/dont-bother-trying-to-pick-stocks

Risk warnings and important information

This article is intended for clients, including prospective clients, of MASECO LLP.  It may not be copied, forwarded or distributed to any other person without MASECO’s prior written consent.

Use of information:

  • Nothing in this document constitutes investment, tax, legal or any other advice and should not be construed as such.
  • This document is provided for information purposes only and is not intended to be relied upon as a forecast, research or investment advice.
  • This document does not constitute a recommendation, offer or solicitation to buy or sell any products or to adopt an investment strategy.
  • Any views or opinions expressed in this document do not necessarily reflect the views of MASECO LLP as a whole or any part thereof.
  • The information contained in the article is from sources which MASECO LLP believes reliable, however, MASECO gives no assurance or guarantee that the information is accurate, current or complete and it should not be relied upon as such.

Risk Warnings:

  • All investments involve risk and may lose value. The value of your investment can go down depending upon market conditions and you may not get back the original amount invested.
  • Your capital is always at risk.
  • Currency exchange rates may cause the value of an investment and/or a portfolio to go up or down.

Performance:

  • Past performance is not a reliable indicator of future results.

MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is registered in England and Wales as a limited liability partnership (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, London WC2R 0HS.

MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is registered with the US Securities and Exchange Commission as a Registered Investment Adviser.


Leave a comment

You must be logged in to post a comment.