Beware of investment returns that are too good
August 31, 2024
If you hear of investment returns that seem too good, be cautious in case this information is misleading, writes Peter Watson.
We must use our good judgement when we hear of investment returns that are too good.
For example, from the world of sports, if you heard an athlete ran a 100-meter dash in eight seconds, you could initially think what an incredible race. However, on second thought the winning time for that race in the recent Summer Olympics was just under 10 seconds.
It is highly unlikely an eight second time would be possible.
The same critical thinking is necessary when hearing investment returns. Fama and French have done extensive research on returns of mutual fund managers.
Only three per cent of managers beat the underlying market and the scholars attributed that to luck versus skill. When you see superior investment results it’s a good idea to be cautious.
Information from Unusual Whales, Congress vs SPY in 2023 shows a third of the 100 members of the US Congress who reported their personal investing results outperformed the S&P 500 index during 2023.
Those are very good returns given the index appreciated by 24 per cent, and if we look more carefully, we can see that without the strong results of a handful of tech stocks that make up the Magnificent Seven most stocks had a poor year.
According to the SPY report many securities trades seemed suspicious and unusually timed and those trades resulted in “huge gains”. Elected officials traded in industries that were being reviewed by Congress.
Trading based on information that is not public is called insider-trading and is illegal. The Unusual Whales report suggests this type of trading leads to suspiciously good results for many members of Congress.
We encourage you to ask questions when you hear of investment returns that appear to be extraordinarily high.
Is there a reason for these superior returns? There often is.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com. ACPI is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and the Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through Watson Securities, an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/Watson Securities and covered by the CIPF. Financial planning services are provided through Watson Investments. Watson Investments is an independent company separate and distinct from ACPI.
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