My recent Internet study helped me determine that it is more difficult for professional money managers to beat the market, than it is for major league batters to hit .300 in a baseball season. How can that be? After all, hitting major league pitching is considered one of the toughest feats in all of sports. 25 major league batters hit .300 or higher last year, but Tony Robbins, in his insightful book Money: Master the Game, credits only 4% of mutual fund managers as beating the market annually. Outpacing the S&P 500 is the generally accepted metric for beating the market, and history has proven that accomplishing this feat is very difficult. Based on this information, the author of this article suggests that readers should keep their day jobs, (making it in the major leagues is a tall order), and invest in an index fund.
Now, on second thought, let’s keep our day jobs but take a closer look at beating an index fund in the market. Let’s first examine why so few money managers can beat the market annually. The well-known fact why they can’t beat the market is the charging of excessive fees. Particularly in 401ks, the fees can be too big a hurdle to overcome. When the fund manager charges 2-4% annually, it is too much ground to make up. Although they are very pleased to be raking in that kind of cash, fund managers fall victim to less than stellar returns. The bigger problem, that is less frequently discussed, for beating the market is that these money managers have limited options in which to invest. Why, you ask, do they have limited investment options to consider? The reason is simply that they are investing huge sums of money. Therefore, in many cases they are either investing in large cap stocks which make up the index funds or invest in the index funds themselves. Now, it does not take a genius to determine that if one essentially invests in the makings of the index and charges fees, that his result will be short of the index average.
So, how can an individual beat the market? Beating the market requires one to invest in entities which have the capacity to beat the market, and today Business Development Companies (BDCs) will be explored. Investopedia defines a BDC as “a form of unregistered closed-end investment company in the United States that invests in small and mid-sized businesses.” In total, there are 45 publicly traded BDCs. Essentially BDCs are smaller companies which pass through a very high percentage of their investment company taxable income to their shareholders in the form of a dividend. BDCs, therefore can reward shareholders both in terms of an increase in the price of their stock and in the form of a sizeable dividend. Fund managers generally cannot invest in BDCs because of the large sums of money they have to invest. BDCs can help smaller investors beat a market index because of their potential for growth and the dividend payout.
One essential point to make regarding BDCs is that some of these stocks trade on light volume. Investors must be careful when buying and selling light volume stocks. For more information on BDCs, contact Innovative Investment Solutions, Inc.
IMPORTANT CONTENT DISCLAIMER
The information presented and made available in this article is intended for educational purposes only. The information is not and should not be confused with investment advice and does not attempt or claim to be a complete description of any specific securities or markets. This information is of a general nature and has not been prepared with regard to any particular person’s investment objectives, financial situation and/or particular needs.
The opinions and analyses included herein are based on sources and data believed to be reliable and are presented in good faith; however, no representation or warranty, expressed or implied is made as to their completeness or accuracy. It is imperative to understand your investment risks since all stock and option investments involve significant risk. The risk of loss in trading securities and options can be substantial.