What your financial advisor is hiding from you

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Most University student’s decisions to study finance were mainly influenced by movies. Hollywood sells the idea of the big shot stockbroker or financial advisor who can beat the market more than any of his competitors, so we grow up dreaming of becoming that guy who can beat the market. However is it really possible to beat the market CONSISTENTLY?

That’s the subject we will be covering here.

One thing we need to cover here is the efficient market hypothesis. The efficient market hypothesis states that the edge that you’re trying to get over the others can’t be found. So the hint that you’re searching on a particular stock, when you finally find it, your edge will already be GONE. A more literary definition would be that stocks already reflect all available information.

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Efficient market hypothesis

Since it’s a hypothesis, do everyone think the same way? Nop

There are 3 forms of this hypothesis:

1: The weak-form says that the stock price fully reflects all the historical data of the stock. So the investors that agree with this version, think they can beat the market by finding latest news about the company.

2: Semi-strong form says that the stock price already fully reflects all publicly available information regarding stocks, that is all the articles that you read on mainstream media or any of your favorite blogs. This investor believes he can beat the market only by accessing insider information.

3: Strong-Form says that the stock price fully reflects all the publicly available information AND EVEN INCLUDING THE INFORMATION AVAILABLE TO PEOPLE INSIDE THE COMPANY! Those investors think you can’t beat the market, so you should go for a more passive approach.

I know, I know, the third one is truly heart breaking. But only if you agree with that form of the hypothesis.

Information

So it all comes down to information if you are an advocate of the weak-form. You have to know that finding valuable information isn’t easy and it’s costly.

Investment firms of large portfolios have the ability to do it because they have the resources. For example, let’s say you are managing a 150 million dollar portfolio, if you beat the market by only 1 percent you’ll gain 1.5 million. Moreover, it means that you could have spent up to 1.5 million to search for invaluable information.

On the other side if you are an individual investor and let say you have 10,000$.

If you spent hours, and hours gathering data to finally gain that 1 percent increase, you’ll only gain 100$!

Nothing is easy in the world, not even making money in the stock market.

But wait, can the increase in return be sufficiently large to pay for the costs of the mutual fund your financial advisor offered you?

You guess it…NO

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A study in the Journal of Portfolio Management, actively managed stock market mutual funds were compared with the S&P 500.

The study concluded that 96% of mutual funds underperformed the U.S market index after fees, taxes, and survivorship bias. So your financial advisor can’t get you over the average returns consistently.

Then what is your option as a small investor?

Index Funds or Exchange-traded funds (ETFs)

However if after reading this, you still believe that you have the insight to beat the market, make sure to follow my blog!

I will be giving you the tools you need to go for the fight, may you win!

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