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Overhyped Wall Street Lingo

The terms “Outperform" or "Underperform”

To become a successful investor, one must have the emotional fortitude and discipline to avoid many of the distractions in the financial media. One certain distraction revolves around the concept of “Outperforming” or "Underperforming." Outperforming or underperforming WHAT? The "Market"?

What defines the Market? Today, most investors use the S&P 500. The reason is twofold: first, the S&P has been the best asset class performer for quite a few years now, and second, it includes many of the most popular companies we all know. So, in a period where the S&P is rising, it may be natural to compare our portfolios to whatever is the leading index at the time.  But should we evaluate each of our investments this way? The short answer is no.  

As an example, from 2000 through 2012, the S&P 500 (i.e., the "Market") UNDERPERFORMED 1-Month Treasury Bills for this entire period. Were investors using the S&P 500 as a barometer back then? Probably not. In fact, there were two other times in history when the S&P 500 underperformed treasury bills for at least 13 years: 1929 -1943 and 1966-1982. During those years, investors were only concerned about not LOSING money so it was the ABSOLUTE return that was more important then. But today, the reality is that many investors have the fear of missing out (FOMO)--or underperforming—and are more concerned about their "relative" return to the S&P 500.  

However, what happens when the S&P is not as strong?  Think back to 2022:  If you were down 17%, you actually “outperformed” the S&P 500. Were you happy? Doubt it.  Human nature makes us less concerned with “outperforming” a random index in a down year, but more focused about “outperforming” it in a good year!!  But to be a successful investor over time, you must have a consistent investment strategy, not waver from it depending on the market. Of course, this is much easier said than done. Astute, long-term investors SHOULD be thinking: Am I “outperforming” or “underperforming” my financial plan and my financial goals...(as opposed to some arbitrary index that happens to be having a very good run!)  

Investors have a much better chance of achieving financial independence if they can learn how to truly understand the meaning and relevance of the terms “outperform” and “underperform.” RELATIVE performance will not necessarily put food on the table or pay your bills in 10-20 years. A consistent, disciplined, diversified investment approach has a far greater chance of doing so even if you “underperform” a few years along the way!!

The term "Private” 

Again, human nature makes us think something called “private” is special. It lures us in…

Today, Wall Street is selling “private” investments like hotcakes. Remember what we have been saying for years: the low-cost, tax-efficient world of exchanged-traded funds (ETF's) is eating Wall Street’s lunch. Wall Street can’t make any money in ETF’s. So, they have been turning to selling expensive, fee-laden, private investments.....aggressively!

To be clear, not all private investments are poor investments. But buyers need to be extremely careful with these types of investments. Fees are generally very high and NOT transparent in these investments; they also are often very illiquid. Liquidity is not something to overlook.  It’s easy to think you don’t need liquidity until you do. We have helped clients try to get out of some of these types of investments---it is not fun and can be financially costly. Plus, because the markets for these investments can be very opaque, it is very hard to know if the price you are getting is a fair one. There are so many great, low-cost transparent investments to choose from nowadays...Why make things so much more complicated than necessary?

In another example using the term private----"private wealth management"--- here too we find some questionable investments. We had a client move from one of these “special”  teams where their cash position was sitting in a proprietary money market that costs over 50% more than a comparable money market with our own custodian! That is approximately an extra 21 basis point annual fee---just on cash! In another case, a “private” portfolio was stuffed with structured notes and high-fee mutual funds, not one single low-cost ETF. Investors should just be wary of the term “private” as it just might not be as special as it’s marketed to be.

The phrase “Fee Models/Fiduciary rule”

Quite frankly, as fiduciaries ourselves, we are even getting tired of talking about this never-ending debate! The Department of Labor (DOL) is once again trying to revive this rule/debate, but it’s gone nowhere for years. Much of it revolves around conflicts of interest between what type of advice is provided and how that financial professional is compensated.

From our perspective, it’s pretty simple: Conflicts of interest are everywhere, not just in the financial services industry. But when searching for a financial advisor (FA), investors absolutely should know what they are. There are "fee-only" advisors (like NCM Capital), "fee-based" advisors, and "commission-based" advisors. Any investor working with a FA SHOULD know how their advisor is compensated and ask about the potential conflicts of interest. With so much of any person’s future retirement security at stake, it’s crucial to understand your relationship with an advisor. All you have to do is read any financial publication regularly to see how badly investors can be misled. 

Again, to simplify it, yes, there are conflicts of interest everywhere. However, we would advise investors to find ways to minimize those conflicts; it’s almost impossible to eliminate them completely. Just be smart and minimize them and understand what they are. 

Our closing thoughts: 

Don’t get caught up in the day-to-day obsession about what’s outperforming or underperforming. In 10 or 20 years from now we doubt anyone will look back and say, “Gosh, I wish I outperformed the S&P.” Instead, they might look back and think, “If I just stuck with a good plan and strategy, I might have been able to retire 3 or 5 years earlier than I did.” 

As the great investor Charlie Munger said, “Show me the incentive and I will show you the outcome.” Beware of aggressive marketing and sales pressure. 

And lastly, there are conflicts all over Wall Street. Understand them and minimize them; you will make better and smarter decisions with your finances.

We hope everyone has a great week ahead!


NCM Capital Management

Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services.  For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV. Readers are encouraged to consult with their own professional advisers, including investment advisers and tax/legal advisors. NCM Capital Management, LLC does not provide legal or tax advice. NCM Capital Management, LLC can assist in determining a suitable investing approach for individuals, which may or may not resemble the strategies outlined herein.