Fear of missing out is a sure way to make costly stock-investing mistakes (via MktwHulbert)
An earlier version incorrectly indicated that David Einhorn of Greenlight Capital had decided to quite the hedge-fund business.
A good analogy is a slot machine. Every few minutes one of the many machines in a casino will hit a jackpot, leading to sirens and bells and general hoopla. This induces in everyone else the sense that “I could just have easily been the winner” and, in turn, “let me keep trying again and again.” The key, of course, is to focus on the average. According to the Credit Suisse Hedge Fund Index, a composite of approximately 9,000 hedge funds that reflects performance net of all fees and expenses, the average hedge fund in 2018 did barely better than the S&P 500 SPX, -0.39% , losing 3.2%. While that’s better than the average open-end actively managed mutual fund, it’s hardly the stuff to trigger FOMO.
This 60/40 portfolio lost 2.1% in 2018, versus the 3.2% loss for the average hedge fund. Last year’s performance was not a fluke: Over the past 25 years, the 60/40 portfolio has beaten the Credit Suisse Hedge Fund Index by an annualized margin of 7.8% to 7.3%. A 60/40 portfolio that substituted long-term Treasurys for intermediate-term Treasurys would have done even better, producing an 8.9% annualized return.
I’m referring to The Prudent Speculator, edited by John Buckingham. I calculate that it has produced an annualized return through Jan. 31, 2019, of 14.6% annualized. In contrast, Fidelity Contrafund FCNTX, -0.65% , the best performing open-end mutual fund over this period, has produced a total return of 13.6% annualized.
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