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Why investors should understand stock market details

Why investors should understand stock market details

September 7, 2022

In Canada only 33 per cent of managers outperformed the underlying index after one year. After five and 10 years the outperformance was only six and 19 per cent respectively. Similar results were experienced by US managers.

This information is from S&P Dow Jones Indices from their Year-End 2021 SPIVIA Scorecard. SPIVIA stands for Standard Poor Index vs Active.

Some managers have been successful at beating the underlying market. Based on past results, that over performance is short-lived and not indicative of future outperformance.

A quote from the report said, “There were a total of 173 funds that ranked in the top quartile for their style category in 2017. Of these 173, five funds (2.9%) stayed in the top quartile annually through 2021.”

As an investor, what can be learned from this information?

One. Outperforming the stock market is very difficult. Managers buy and sell stocks on a regular basis and there are management fees and trading costs that are incurred. When these costs are considered, it is understandable to expect less than half the managers will outperform the underlying market.

Two. When a fund manager beats the market that does not automatically indicate their winning streak will continue. Investing in the manager with the best performance results last year is not a reliable indication that history will repeat itself.

Three. There is a cost to investing in stocks. That is a reality. An investor can be proactive and ensure those costs are reasonable.

Your goal as an investor is to get good value for investment services.

Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Only investment-related products and services are offered through Watson Securities of ACPI. Peter Watson provides wealth management services through Watson Investments. He can be reached at