96% of Institutional Money-Managers Are Getting This Wrong

If you've ever sat down and done your own investment research or watched CNBC, there's a good chance you've run across an advertisement by an investment firm offering asset management services. And as we've witnessed with third-quarter earnings results from investment advisory services, these firms are doing exceptionally well, so people are clearly biting on those calls for assistance.

I would guess that if you interviewed investors at random, a majority would tell you that institutional money-managers have knowledge about investing that exceeds what the average investor can learn. Indeed, given their six- or seven-figure salaries, most money managers should have a keen understanding of the market, and the result should be market-topping returns on a somewhat regular basis.

Source: Raiffeisenverband Salzburg, Wikimedia Commons.

Institutional money-managers are getting this wrong
Unfortunately for investors in select money-management firms, this isn't always the case. Finance professors Bidisha Chakrabarty, Pamela Moulton, and Charles Trzcinka -- respectively from Saint Louis University, Cornell University, and Indiana University -- reported in a recent study (link opens PDF) that between 1999 and 2009, more than 96% of funds completed round-trip trades that lasted less than one month.

Why is this important? Because the majority of funds that completed short round-trip trades of less than one month (within an analysis of 1,186 separate funds and more than 105 million round-trip trades) wound up losing money on those trades, according to the academic trio's findings. Furthermore, their research report notes that "cutting one's losses" was often not the primary reason for short-term holding, but rather a fund managers' overconfidence or desire to appear active in managing investors' money. 

You might not think this is a big deal, but allowing your gains to compound over the long term, including dividend gains, is where your biggest gains are to be made. This doesn't discount the fact that some of these institutional investors did nab big gains over the short term in some instances, but they were much more likely to leave bigger gains on the table. In addition, in cases where these funds did make money they set themselves up to pay short-term capital-gains taxes on the profit, rather than long-term capital-gains taxes, which are significantly lower.

You can do it -- we can help
So what's an investor to do in light of these statistics?

Here at The Motley Fool, we'd like to think you have the opportunity to help yourself, regardless of your investing knowledge. If you're a beginner, implementing the "13 Steps to Investing Foolishly" could be what puts you on the path to financial independence and allows you to make smart financial decisions for yourself.

For more seasoned stock-market investors, some long-term stock ideas might be in order. I have a couple that just might do the trick. Of course, I strongly suggest you do your own digging, as not every stock listed here may meet your investing objectives.

Coca-Cola (KO 0.68%) could be the right company for more conservative investors who are looking for something they can essentially set and forget within their portfolio or individual retirement account. Coca-Cola has a diverse range of carbonated and still beverage products sold across the globe (in all but two countries) and has 94% brand recognition throughout the world. Coca-Cola's yield of 2.8% isn't too shabby, either, and will nearly equal or even outpace inflation rates in more years than not. Having a basic product that tends not to be affected by global recessions is certainly one strategy for success.

If you're an investor looking for something that offers a higher growth rate, I would recommend digging more deeply into payment processing facilitator MasterCard (MA -1.19%). Because MasterCard strictly handles payment facilitation and not loans, only a severe global recession will affect the number of transactions and the gross dollar value that it processes. With much of the world still conducting transactions in cash, MasterCard has what could be a multidecade double-digit growth opportunity. MasterCard's dividend yield of 0.3% leaves a lot to be desired for income investors, but it's certainly a company you may never have to sell.

Finally, every once in a while we get lucky and are offered the chance to invest in a company with both a reasonably high yield and exceptional growth potential. For you, that might be oil and gas pipeline and storage giant Kinder Morgan (KMI 2.53%), which sports a 4.7% yield but should be able to grow its bottom-line profits by double digits over the next five years. While a lot of the glory in the energy sector goes to drillers that pump oil, natural gas, and natural-gas liquids out of the ground, the transportation and storage of these assets is where the steady production and cash flow comes from. Kinder Morgan is at the heart of a gigantic domestic energy boom and could make for a fantastic long-term investment.

Long-term investing is likely your best bet to a happy retirement and is the most effective way for you to potentially outsmart some of the highest-paid institutional money-managers out there -- who are getting it all wrong.