Jim Cramer says a hedge fund he once managed delivered annual returns of 24% over 14 years, compared with 8% for the S&P 500 over the same period. Even so, when asked about a retiree’s portfolio, the CNBC “Mad Money” host recommended that most investors consider an S&P 500 index fund. The contrast highlights the potential rewards of stock-picking—and the time and effort it can demand.
A $600,000 retirement account and a 1% fee
A listener named Dave asked Cramer for advice on behalf of his girlfriend, a retiree over 60 with $600,000 in a tax-deferred account. Her advisory firm charges an annual management fee of 1%, or about $6,000 based on the account’s current value.
Dave said the portfolio had lagged the S&P 500 and had little exposure to the “Magnificent Seven” megacap technology stocks. Cramer said the decision to pick stocks directly depends in part on whether an investor has time to keep up with the market and is comfortable with the volatility and decision-making that active investing can involve.
Cramer sees room for stock-picking, but favors index funds for most
Cramer cited his former fund’s after-tax performance in arguing against a strict reading of the efficient-market hypothesis, which holds that asset prices reflect all available information. He said markets can sometimes misprice stocks, leaving opportunities for investors who research individual companies to outperform the broader market.
But Cramer said index funds are a better fit for most people, a view he said he has held since 2000. In response to Dave’s example, he said investors who cannot beat the S&P 500 can choose to track it. He did not rule out active stock-picking, but described it as better suited to people willing and able to do the research.
Fees and benchmark returns shape the comparison
In the retiree’s case, the adviser’s fee is about $6,000 a year, while the portfolio was described as trailing the S&P 500 and having limited exposure to the Magnificent Seven. Cramer’s response put fees, holdings and benchmark performance at the center of the decision: investors need to weigh results after management costs against whether they can consistently research and manage a portfolio of individual stocks.
Cramer’s cited annual returns of 24% for his former fund and 8% for the S&P 500 refer to the same 14-year period. Those figures do not mean other active strategies can replicate that performance. His recommendation for most individual investors remains to consider index investing, while he sees a role for active investing among those prepared to research companies and accept the possibility of differing results.