Why are Market Rates of Return More Reliable?
You have two very distinct choices when you select a financial advisor to invest your assets in the securities markets. You can select the “beat-the-market” advisor or the “match-the-market” advisor”.
What is Beat-the-Market?
Even though it is waning, financial advisors continue to sell beat-the-market investment strategies because it helps them justify higher fees.
For example, if the S&P500* is up 10%, the beat-the-market advisors would have to produce returns that are significantly higher than 10% to offset increased risk and expense.
*The S&P500 is a proxy for the large-capitalization U.S. stock market.
What is the Match-the-Market?
Increasing numbers of financial advisors are starting to sell match-the-market investment strategies because they are more reliable.
Instead of trying to pick the best investments, the match-the-market advisors select index funds and exchange-traded funds that capture the performance of various market segments (domestic, foreign, stocks, bonds, real estate, etc.).
What is a Crystal Ball?
The beat-the-market advisors will try to convince you they can identify the securities and funds that will perform the best in the future. The ability to predict future performance requires not only a crystal ball but an extremely accurate one.
GlidePath believes the global markets are too complex to predict. In fact, there are hundreds of potential variables that impact the future performance of the securities markets and individual securities.
What About Risk Exposure?
You are exposed to more risk if your advisor is trying to beat-the-market. It is the risk of being wrong, which happens all the time. No advisor has a crystal ball that is 100% accurate.
You are rewarded for taking the extra risk if your advisor’s results beat market returns by a significant margin.
You are not rewarded for the extra risk if your advisor’s results lag the market.
An important metric for calculating performance is your risk-adjusted rate of return. It is a formula that calculates rate of return per unit of risk.
What About Expenses?
A beat-the-market strategy is significantly more expensive than a match-the-market strategy.
Beat-the-market requires a team of relatively expensive professionals trying to identify the best performing investments of the future: Chief Investment Officers, Analysts, Portfolio Managers, and support staff.
Match-the-market advisors use financial technology to identify the funds that match the performance of the markets for the lowest overall expense.
In general, a match-the-market advisor will charge a significantly lower fee than a beat-the-market advisor.
What About GlidePath Wealth Management?
GlidePath does not believe investors are rewarded for the additional risk and expense of beat-the-market investment strategies over longer periods of time. Anyone can get lucky for shorter time periods.
GlidePath selects benchmarks that capture the performance of the market. For example, a benchmark for the performance of large capitalization stocks could be the S&P500. GlidePath invests client assets in an S&P500 Index fund or an Exchange Traded Fund that mirrors the performance of the index.
GlidePath uses a match-the-market investment strategy that can be adapted to the needs of individual investors.
We invest in global asset classes to maximize diversification and minimize the risk of large losses.