When it comes to portfolio management, differing strategies for optimizing returns can make investors unsure of how to achieve significant, reliable growth over time. Some advisors suggest complex portfolios yield the greatest gains. At First American Bank, however, we take a straightforward, data-backed approach to investing. By opting out of the uncertainties and high costs of complex portfolios and exotic instruments like hedge funds, we believe investors can realize impressive, consistent returns that will meet their long term financial goals.
To uncover the concrete reasons behind our “keeping it simple” philosophy, we explore the contrasts between hedge funds indexes and U.S. large cap stocks.
Amid rising costs, investor returns are an integral component of portfolio assessment and a driving force behind investing. What we like about U.S. large cap stocks is that this asset class offers impressive returns, deferred taxes and significant liquidity. Should investors need to raise cash, they can sell their shares with very low transaction costs and receive cash in three days. Until shares are ultimately sold, the investment compounds tax free. By contrast, mutual funds typically rebalance forcing them to recognize capital gains and hedge funds require long term commitments without better long-term returns.
Take a look at the chart below where our financial analysts compared historical annualized returns of the S&P 500, a U.S. large cap stock index, and Hedge Fund Research – Equity Hedge Fund Index for periods ending in 20xx
*The above chart shows data collected through December 31, 2021*
You’ll notice above that the annualized returns for S&P 500 (in gray) impressively outperformed the annualized returns for the Equity Hedge Fund Index (in blue).
Aside from returns, portfolio fees are another consideration of investment management and an important influence on net investor profits. Investments in U.S. large cap stocks have low fees—deducting little from investors’ net profits. On the other hand, some complex portfolios can come with costs amounting to 2% of assets and 20% of profits each year.
Volatility over the long run
In the above chart, you will notice that the volatility for S&P 500 index is higher. Through highs and lows, market volatility is unavoidable. Though some investors may be apprehensive about the idea of investing in asset classes with higher volatility, we go back to the data to prove that stock volatility cools off over time. Take a look at the chart below, where we can consistently see that volatility neutralizes and cools off over time. Because of this, long-term investors who withstand volatility are in a good place to receive the high returns they seek.
*The above chart shows data collected through December 31, 2021*
Simplified tax obligations
High returns do not have to come with complex taxes. A simple portfolio can save investors time and money through streamlined tax obligations. U.S. large cap stocks allow investors to avoid complex paperwork such as K-1 tax forms so they can file more efficiently.
Complicated portfolios often require thorough tax documentation to account for their diverse and exotic holdings. For example, K-1 tax forms typically come as a requisite of hedge fund investing.
Increased transparency and control
Our investment philosophy considers not only clients’ financial health, but also their investor experience. We have found that investments such as U.S. large cap stocks provide investors with a greater sense of control over and clarity about their portfolios. U.S. large cap stocks are obliged to report all return and growth metrics, so investors are informed by past performance data, giving them greater confidence in their decisions
With more complicated investment instruments, investors may have a harder time pinpointing exactly where their money is going. Given that with hedge funds, managers are not required to report portfolio returns to anyone but investors, public data about fund performance could potentially highlight only the most favorable results. Data reporting on the S&P 500 index, however, is required, whether it’s favorable or not.
Streamlined investments call for long-term partnerships
First American Bank supports clients over the long haul with a data-backed philosophy. Our investment advisors build simple, high-performing portfolios and provide personalized support throughout their investment journey—so that planning for your future is straightforward, transparent, and under your control.
This information is for educational purposes only. It is not legal or tax advice. For legal or tax advice, you should consult your own counsel.
