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Eight Threats

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8 Threats to Portfolio Performance

The last decade has been a challenge for many investors, especially those investing for the long term and retirement.
Given declines in global stock markets, many investors have seen little to no real growth in their portfolios over this period. For example, $10,000 invested in the S&P 500 Market Index in 2000, was worth just $10,456 at the end of 2010. And this does not take into account inflation, investment fees and taxes.1
This White Paper explains why investors’ portfolios may underperform in both bear and bull markets and incur substantial costs in the process. It also details the impact this chronic underperformance can have on achieving long-term financial goals.

Threat 1: The Expenses of Active Management
Most us would like to beat the market, but as we’ll explore in this whitepaper, even many professional money managers have had a hard time performing better than the market. To understand why, it is helpful to begin with some definitions.
Active investors (and active money managers) attempt to out- perform stock market rates of return by actively trading individual stocks and/or engaging in market timing — deciding when to be in and out of the market.
Those investors who simply purchase “the market” through index or asset class mutual funds are called passive or “market” investors.
Active mutual fund managers are typically compared to a benchmark index. For example, large cap mutual funds are often compared to the S&P 500 index. To beat the index, an active mutual fund must perform better than the weighted average return of those companies in the index. And they must do so while including fees, taxes, trading costs, etc. so they report a real rate of return.
A lot of time and money is spent attempting to “beat” the market. Professor Ken French of Dartmouth’s Tuck School of Business estimates that

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