Sizing Up the Competition

We're going head to head with stock market pros this year, by comparing the results of buying the S and P 500 Index with that of professional investment strategists.  In order to compare track records, let's look at how they did last year.  All initial recommendations were taken from Barron's Magazine December 22, 2008 (and changes to portfolios were published as of September 7, 2009, and calculated as of September 30, 2009).

What Happened Last Year

S and P 500 Ended the Year at 1115.10
S and P Earnings were $55.91
Fed Funds Rate was .25%
10 Year Treasury was 3.85%
Best Performing Sectors were: 
Technology (59.92%), Materials (45.23%), and Consumer Discretonary (38.76%)
If you'd bought the Index, you'd have been up 23.45% for the year.

What the Pros Predicted

Black Rock (Robert Doll)
S and P 500 - 1050 (5.8% low)
S and P Earnings - $57.5 (3% high)
Fed Funds Rate - 1% (300% high)
10 Year Treasury - 3.25% (16% low)
Best Performing Sectors: Technology (49.47%), Energy (11.29%), and Health Care (17.07%).
Sold Technology in the 4th quarter.
Portfolio return 25.94%

Deutche Bank Private Wealth (Larry Adam)
S and P 500 - 1025 (8% low)
S and P 500 Earnings - $71 (27% high)
Fed Funds Rate - .125% (50% low)
10 Year Treasury - 2.75% (29% low)
Best Performing Sectors:  Technology (59.92%), Consumer Staples (11.2%) and Health Care (17.07%)
Sold Consumer Staples in 4th quarter, and replaced with Energy and Industrials. 
Portfolio return 32.4%

JP Morgan (Thomas Lee)
S and P 500 - 1100 (1% low)
S and P 500 Earnings - $65 (16% high)
Fed Funds Rate - 0% (was .25%)
10 Year Treasury - 1.65% (57% low)
Best Performing Sectors:  Financials (14.8%), Consumer Discretionary (38.76%) and Health Care (17.07%).  Sold Consumer Discretionary and Health Care in 4th quarter and replaced with Energy, Technology, Industrials and Materials.
Portfolio return - 28.04%

US Trust (Christopher Hyzy)
S and P 500 - 1020 (8.5% low)
S and P Earnings - $60 (4% high)
Fed Funds Rate - .5% (50% high)
10 Year Treasury - 3% (22% low)
Best Performing Sectors:  Energy (11.29%), Consumer Staples (11.2%), Utilities (6.8%), Technology (59.92%).  Sold Consumer Staples, Utilities, and replaced with Industrials and Materials.
Portfolio return - 22.64%

Citigroup (Tobias Levkovich)
S and P 500 - 1000 (10% low)
S and P Earnings - $62 (10.8% high)
Fed Funds Rate - 0% (was .25%)
10 Year Treasury - 3% (22% high)
Best Performing Sectors:  Technology (59.92%), Financials (14.8%), Consumer Discretionary (39.76%), Telecom Services (2.63%), Health Care (17.07%) and Industrials (17.27%).  Sold Consumer Discretionary, Telecom Services, Health Care, and bought Materials and Energy.
Portfolio return - 23.26%

Goldman Sachs (David Kostin)
S and P 500 - 1100 (1% low)
S and P Earnings $53 (5% low)
Fed Funds Rate - .125% (50% low)
10 Year Treasury - 3.6% (6% low)
Best Performing Sectors:  Consumer Staples (11.2%) and Health Care (17.07%).  Sold both and replaced with Energy, Materials, Financials and Technology)
Portfolio return - 20.35%

Commission and Taxes

Do-it-yourself investors typically pay about .5% in annual fees, and full service brokers typically charge about 2% for their services.

Short-term capital gain tax rates are the same as ordinary income tax rates, which are 25% for most people (who earn between $33,950 and $82,250 per year).  We'll ignore the tax effect on the relatively low (1.94%) dividend rate on both the index and its sectors in this comparison.
Using these assumptions to adjust the returns:

S and P 500 Index - 23.45% - .5% commission = 22.95% net return
Black Rock - 25.94% - 2% commission - 3.25% capital gain taxes = 20.69% net return
Deutche Bank Private Wealth - 32.4% - 2% commission - .58% capital gain taxes = 29.8% net return
JP Morgan - 28.04% - 2% commission - 1.42% capital gain taxes = 24.62% net return
US Trust - 22.64% - 2% commission - .5% capital gain taxes - 20.14%
Citigroup - 23.26% - 2% commission - 1.61% capital gain taxes = 19.65%
Goldman Sachs - 20.35% - 2% commission - 1.94% capital gain taxes = 16.41%

In 2009, 1/3 of the pros listed beat the S and P 500 net return with their recommendations for investing, and you can see for yourself how each predicted the other investing categories for the year.  

Congratulations if you followed the advice of Deutche Bank Private Wealth or JP Morgan last year.  I suspect, however, that Deutche Bank Private Wealth charges higher than 2% for its advice, but we'll keep the figures consistent for comparison purposes.

If you followed the other 2/3, you'd have been better off just buying the S and P 500 Index.  It will be interesting to see if Deutche Bank and JP Morgan will continue to outperform, and whether the others will improve their performance in 2010.