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As Dow Climbs to Record High, Money Managers Underperform
Most investors buy stocks "for the long run" at just the wrong time

By Bob Stokes
Thu, 07 Mar 2013 17:30:00 ET
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Earlier this week (March 5) the Dow Jones Industrials closed at 14,253, above its previous all-time closing high of 14,164 (Oct. 9, 2007). 

Yet along the way to that new record, a phenomenon common to past bull runs also surfaced: Most active stock fund managers underperformed the broad indexes. On Jan. 7, the Wall Street Journal reported that "Nearly 2/3 of US stock fund managers lagged their benchmarks [in 2012]."
A more recent report on the performance of stock fund managers published on CNBC, March 6:
Active managers are still getting clobbered when compared to their benchmarks.
Just 37 percent are faring better than the basic indexes they compete against, according to data from JPMorgan Chase, while 63 percent are missing. A mere 7 percent are topping benchmarks by more than 2.5 percentage points.
Professionals are not alone. Private investors almost always underperform vs. the major indexes.
Robert Prechter provides insights:
Most people don’t know how consistently investors lose money in financial markets. They think that everyone else is getting rich. The only people who know the true extent of financial losses that the public endures are those working in the IRS and in the back offices of brokerage firms. Why? Because most people are too embarrassed to tell the truth, and brokers don’t want them to know it. Neither does the IRS, which makes money from annual gains while forcing taxpayers to shoulder their annual losses.
Some numbers tell the real story. An analysis of Federal Reserve data by professor Edward Wolff, a New York University economist, reveals that two-thirds of American households failed to increase their retirement wealth 'at all' from 1983 to 1998 despite that fact that in this period stocks enjoyed their biggest bull market ever. Moreover, the retirement wealth of the median household during that time actually fell 13 percent. Given that dismal performance during a huge bull market, you can imagine how investors typically ravage their finances during a bear market. In 1909, a broker using the pseudonym Don Guyon wrote a small book called One-Way Pockets. He was utterly mystified as to why, after a full cycle of rise and fall after which stocks were valued just where they were at the start, all his clients lost money. His answer, in a nutshell, is herding. His clients felt fearful at the start of bull markets and so traded in and out constantly. At the market’s peak, they felt confidently bullish and held much more stock 'for the long run.'
The Elliott Wave Theorist, April 2004
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