Joseph Wang Financial - How To Meet (and Exceed) The Indices
It is commonly accepted that the vast majority of mutual funds fail to even match
the performance of its benchmark index (IBEX 35, Eurostox 50, S & P 500, etc.). Long term. Some may beat during certain periods of time, but are not able to overcome long periods. There have been many studies on all mecados and the result has always been the same, mutual funds provide a long-term profitability below its benchmark. Only a tiny amount of funds has achieved and why their managers have come to the History of the Exchange, as Peter Lynch and John Neff .
Because it could be concluded that outperform the indexes is extremely difficult, as professional managers of mutual funds fail to do so.
But beating the index is not difficult. Since the indices do not include dividends paid by companies that make up enough to buy the shares comprising the index in the same proportion as the index weighted to obtain a higher return (Note: If you do not know how to calculate a stock index is to read this article that explains how to calculate these indices ). This would get a portfolio that exactly replicates the index (which would get the same return) but also cobraramos dividends paid by companies, which would make the profitability of this portfolio is greater than the index (recall that the indices do not include dividends). These dividends could be reinvested in buying more shares for the portfolio in the same proportion, and we will get a replica of the total index .
Here's an example;
Suppose an index composed of only 3 companies, the IBEX 3:
Phone: Weighs 50%
Iberdrola: Weighs 30%
FCC: Weighs 20%
If an investor wanted 100,000 euros replicate this index would only have to buy 50,000 shares of Telefnica euros, 30,000 euros and 20,000 shares of Iberdrola shares of FCC euros. If the index to rise over the next year by 20% (for example), your portfolio would be worth 120,000 euros (equal to the rate revaluation), but would also have the dividends paid by these 3 companies. If they had an average return of 3% dividend (at the time of purchase), the investor would have a portfolio valued at 120,000 euros plus 3,000 euros (3% of 100,000). If you roll these replicating the index $ 3,000 (1,500 Telefnica (50%), 900 Iberdrola (30%) and 600 FCC (20%)) get your portfolio replicase mass index IBEX 3 and long-term profitability would get a much higher of the original index, the IBEX 3.
In practice it would take a very large portfolio to replicate an index exactly true, as the IBEX 35, as it would have to buy a lot of companies (35 in the case of IBEX 35) and this would be very high commissions for a portfolio small.
But one need not make an exact replica of the index to beat him. A good strategy is to build a portfolio with a selection of the index you want to replicate, thereby reducing the number of companies to buy and commissions down to levels that do not harm the profitability of the portfolio. The number of companies to buy could be between 10 and 20, depending on the size of the portfolio. To select the most reasonable approach (for safety, performance and behavior as similar as possible to the index you want to replicate) would choose, within larger companies, those that have a higher dividend yield.
Reinvest dividends received in the portfolio without altering the proportion of each company can have a high cost for most portfolios. That is, if collected 100 euros in shares of Banesto's not worth giving an order to purchase shares of Banesto for 100 euros, as the minimum fee would be a high percentage of those 100 euros. You can use 2 complementary solutions to this problem:
Use reinvestment plans dividend with some companies like Banco Santander, BBVA, Banco Popular and Iberdrola. The purchase of shares with this system is exempt from fees, so it can be used for very small the investor's portfolio.
Group dividends and buy more once a quarter for example, shares of the company with the highest dividend yield at the time. Should the company with the highest dividend yield is already well represented in the portfolio could opt for the second (or third) to diversify risk and prevent the portfolio overly dependent on a company.
And why hedge funds fail to beat the index if it is so easy?. Some causes are:
The most important are the committees that represent (approximately) the dividends paid by companies.
The funds are not invested 100%. Legally must maintain a minimum percentage of cash to cover possible refunds, but it is usual that the actual percentage is higher liquidity (in varying degrees) to the legal minimum. I have not invested in stock is in fixed income , which has a long-term returns lower than the stock market and is therefore a drag on the overall profitability of the fund's portfolio.
Funds frequently performed operations of purchase / sale to modify the composition of the portfolio. The fees for these transactions for the purchase / sale are not included in management fees, deposit, etc., But are paid separately. And paid to the fund's assets, which is reduced. The aim of these operations is to increase the profitability of the portfolio, but the fact that they can not do it consistently.
Therefore I think it is more advisable to invest through direct stock purchase that through mutual funds, investment funds but also have their advantages .
It is important to note that if there is a poor selection of companies to invest can get a worse outcome (even worse) than investing in mutual funds.
by: Joseph Wang
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