Market Concentration, and the Power of 1%

Happy Monday, wealthy people! 

When I was interviewing the top fund managers in the world (in order to decide whether or not to approve their funds for the Morgan Stanley platform), I noticed a trend emerging in 2018.

Sitting cross-legged, laptop open, my hand resting on a cup of cappuccino nearby, I asked the successful US fund manager sitting across from me a simple question: “Why are you underperforming?” His answer became a pattern among all the US fund managers: they gave excuse after excuse as to why they could not beat the market, because the market, as defined by the S&P 500 Index, was getting distorted. The largest stocks became too big a part of the index. “We don’t want to invest so much of our fund only in those largest stocks,” the fund managers told me. (When they didn’t, and those stocks rallied, their funds underperformed the S&P 500 Index).

Back in 2018, it was the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google). Then came the so-called Magnificent 7: the previous stocks minus Netflix, plus Microsoft, NVIDIA and Tesla. These stocks keep getting bigger and bigger, causing chaos in active fund managers’ performance. Read on to see just how distorted the US market has gotten today.

In today’s email:

👉 Stock Market Update - Is the S&P 500 too concentrated?

👉 Wealth Building Strategies - The power of an extra 1%.

👉 Ask Me Anything - What went wrong with my fund purchase?

👉 Sip of Learning - A different take on your 401(k).

Grab your latte and let’s get started!

Margarita T., CFA

Founder, Finance Latte

WEALTH BUILDING STRATEGIES

Source: Finance Latte. Returns Not Guaranteed. Hypothetical Example. Not Financial Advice. Investing involves risk including loss of principal.

An extra 1% return for your investments over 30 years can make an enormous $$$ difference. The chart above shows 4 different scenarios as to how much a $10,000 upfront investment can grow over 30 years if the investment returns were 7, 8, 9 or 10% per year.

If your investments grew 7%* (not guaranteed), your $10,000 initial investment could grow to $76k after 30 years. If they grew at an 8%* return? $100k, etc.

With each extra 1%, your ending capital becomes 32% higher 👀.

This is why a TON of finfluencers suggest DIY (Do It Yourself) investing and simply buying index funds for everything. This way you could save 1-2% on actively managed fund fees, plus 1-2% on financial advisor fees. These extra few percentage points can make a huge difference.

We agree with this sentiment but only up to a point. Index funds are a must, but mostly for the most efficient stock markets, like large US stocks (where only 12% of active funds beat the index over 10 years). When looking at less efficient markets, like Emerging Markets? A lofty 70% of active funds beat the Emerging Markets Index, net of fees, over 10 years. (Source: Morningstar, as of January 31, 2024)

What does this all mean? It means that your chances of picking a fund that beats the index in Emerging Markets are pretty damn good. Don’t give up on those extra returns simply by buying index funds for Every. Single. Market. Remember the power of an extra 1% over time. 💪

Choosing Actively Managed Funds is a standalone course in our Investing Accelerator Program (hint: the best funds are not those with 5-star Morningstar ratings). Don’t forget to join our waiting list to get notified first about the program’s start date and for an exclusive early-bird discount to be announced on March 8!

*For context, the global stock markets averaged about 8% return (not guaranteed) over a 30-year period, using the MSCI World Index (USD) as a benchmark. These calculations assume annual compounding, and no trading fees, taxes or inflation.

ASK ME ANYTHING

Question: “I want to hire an amazing person [financial advisor] but she told me that if I hire her, she’ll only meet with me once a year. Is that typical of how often advisors meet their clients?

– Alex B.

Answer: “Hi Alex, that’s an interesting question.

It’s up to the advisor to set the contractual terms of service, so having this discussion upfront to set the right expectations is a great way to start a professional relationship.

Typically, fee-based advisors (where the fee you pay them is a % of your total portfolio) meet with their clients quarterly. Some clients think this is too much and decline the invitation. But the invitation does get extended. Even if you don’t want to meet, the advisors typically still provide you a quarterly performance report for your account.

If you’re hiring a flat-fee only advisor where you pay them by the hour, then you two decide on the meeting frequency, or you can also reach out to them as needed.

– Margarita T., CFA

Got a question for me? Ask it by simply responding to this email.

BINGEWORTHY

🗞️ Article: 15 funds that have destroyed the most value over the last decade, per Morningstar. Cathie Wood’s ARK Invest tops the list.

🎬 Show: Fair Play. A Wall Street thriller where a young woman working at the same asset management firm as her boyfriend, gets promoted over him and her world crumbles...

📚 Book: Quite Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required. An inspiring read of self-made millionaire Kristy Chen, who retired at age 31.

👩‍🎓 Free Resource: Try our Introduction to Investing digital course.

Finance Latte AB is not a registered investment advisor. This content is for informational purposes only and should not be interpreted as investment or tax advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice. Past performance does not guarantee future results. Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment. From time to time Finance Latte AB might include affiliate links in its newsletter or website where we might earn a commission if you subscribe to a publication, or purchase a product you found through us at no extra cost to you. We will not promote any type of investment product, and will only include non-investment/non-finance services or products we believe in. View our Privacy Policy and Terms of Service.

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