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Ignore How The Smart Money Invests Right Now
August 06, 2020

Ignore How The Smart Money Invests Right Now

Written By: Andrew Hallam

You’ve worked hard to save your money. That’s why COVID-19 might be making you nervous. Perhaps you’ve followed the investment advice of Nobel Prize winning laureate, Eugene Fama. He says investors shouldn’t speculate. They shouldn’t alter their portfolio allocations based on economic news or stock market projections.

Still…these are unprecedented times. We’ve put the economy in a cast and it’s hobbling on crutches. It might make you wonder— what are hedge fund managers doing? As an investment speaker, I receive reams of messages from investors every day. Many ask how to tweak their portfolios now. Some people want to pour money into gold or increase their bond allocations. Others are keeping cash on the side, waiting for stocks to plunge before jumping back in.

It’s natural to wonder about hedge funds. After all, lore says they are the Lamborghinis of the investment world. Investors require a high income or lofty net worth just to qualify for these products.

Hedge fund managers have their fingers on the pulse of the economy. When they forecast market plunges, they can “short the market.” That means they can bet stocks will fall and then collect on those bets when stocks drop. These professional traders can also pour everything into gold, bonds or cash when they believe the time is right. In other words, they seem designed for COVID-19.

So, how have they performed?

First, we need a benchmark. Let’s start with what might be the world’s simplest portfolio. In 1991, Scott Burns created the Couch Potato portfolio. It’s like a Ford to a hedge fund Lamborghini. It includes a 50-50 split between U.S. stocks and bonds: Vanguard’s Total Stock Market Index (VTSAX) and Vanguard’s Inflation-Protected Securities Index (VIPSX). 

Scott likes to say, if you can fog a mirror and divide by two (you could even cheat with a calculator) you could manage your own Couch Potato portfolio. This Ford has a simple shell, but it dusts most Lamborghinis, no matter what the surface.

And 2020 has been tough terrain indeed. Stocks plunged in March, causing many professional traders to scurry around in panic. But if you followed the Couch Potato method, and kept your cool, you would have gained 4.81 percent between January 1, 2020 and July 30, 2020. That thrashed the return of most hedge funds.

The HFRX global hedge fund index tracks hedge fund performances. It updates them every day. While the Couch Potato portfolio gained 4.81 percent, the typical hedge fund earned just 0.23 percent over the same time period.

You might consider this a freaky aberration. But the Couch Potato portfolio has trounced the typical hedge fund every year since 2003. 

Every year. No exceptions. 

In fact, if you invested $10,000 in the average hedge fund in January 2003, it would have grown to $12,414.41 by July 30, 2020. That’s a total gain of 24.14 percent.

In contrast, a $10,000 investment in the Couch Potato portfolio would have soared to $35,378.20 over the same time period. That’s a total gain of 253.78 percent for the Couch Potato versus just 24.14 percent for the hedge funds.

Hedge fund critics blame their high fees. But there’s an even bigger issue. If hedge funds charged lower fees than index funds, the Couch Potato portfolio would have still beaten them to a pulp. Here’s why: Nobody can consistently predict the future. That’s why you should ignore magazine headlines screaming, “Here’s What Hedge Fund Managers Are Buying Right Now!” 

Hedge fund managers can’t time the market. They can’t successfully keep cash on the side to take advantage of cheaper markets. They can’t successfully add gold or bonds when or before they think stocks will fall. And if they can’t do it, you’re best not to try.

There’s genius in simplicity. 

That’s why, whether you own a Couch Potato portfolio or a more diversified basket of low-cost index funds, remember to stay the course. Keep calm. Carry on. Ignore investment news and don’t ever speculate.

Couch Potatoes Crush Hedge Funds

Year Hedge Fund Returns Growth of $10,000 Couch Potato Returns Growth of $10,000
2003 13.40% $11,340.00 16.20% $11,620.00
2004 2.70% $11,646.18 10.50% $12,840.10
2005 2.70% $11,960.63 3.60% $13,302.34
2006 9.30% $13,072.97 9.90% $14,499.55
2007 4.20% $13,622.03 8.80% $15,775.51
2008 -23.30% $10,448.10 -20.4% $12,557.31
2009 13.40% $11,848.14 19.90% $15,056.21
2010 5.20% $12,464.25 10.60% $16,652.17
2011 -8.80% $11,367.39 6.70% $17,767.86
2012 3.51% $11,766.39 11.56% $19,821.35
2013 6.72% $12,557.09 12.50% $22,299.56
2014 -0.58% $12,484.26 8.25% $24,139.27
2015 -3.64% $12,029.83 -0.70% $23,970.30
2016 0.86% $12,133.29 8.75% $26,067.70
2017 0.73% $12,221.86 12.07% $29,214.07
2018 -6.70% $11,403.00 -3.32% $28,244.16
2019 8.62% $12,385.93 19.51% $33,754.60
2020 (to 7-30-20) 0.23% $12,414.41 4.81% $35,378.20

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This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.