Imagine if you read a news report about your local school district which said that last year 63% of the children enrolled there were failing to perform at their grade level. Despite millions spent on the best teachers and curriculum the majority of kids were earning Ds and Fs. Think about it…
You’d naturally be concerned.
But imagine how puzzled you’d be if the headline of the report said, “Tests Show Good Year For Local Schools.” And the story went on to explain that the 63% failure figure was a marked improvement over the district’s five year average of an 84% failure rate.
You might wonder if the person writing the report had a vested interest in keeping the current school administration in place.
Each year a similar report card is issued in the financial world with an equally rosy analysis.
The S&P Benchmarks vs. The Active Managers
In the spring of each year the S&P Dow Jones Indices releases the SPIVA Scorecard, which rates how active fund managers did versus their sector benchmarks for the past year. For the U.S. they assess the average performance of funds according to capitalization size, style, sector and other factors. The study compares actively-managed funds with the relevant benchmark index applicable to their funds over several time periods. The goal is to determine if active managers can outperform their benchmarks, given the activity and higher costs.
According to some in the financial press, the fact that only 63% of large cap funds underperformed the S&P 500 in 2017 was seen as a win for active managers. An analysis for Forbes written by financial journalist Lawrence Carrel was given the headline “SPIVA Reports Good Year For Active Management In 2017.”
In his article he went on to present the statistics fairly. But in a climate where the active management philosophy is championed by many pundits, Carrel needed to choose his words carefully. The SPIVA Score Card tells an increasingly dismal story for active managers as the time period stretches from 1 year to 3, 5, 10 and even 15 years.
Yes, You Can Beat The Market – Here’s How
The truth is that it is possible to “beat the market” or a relevant benchmark by picking stocks, or making tactical timing bets, even when accounting for the added costs. But the sad truth is it’s very difficult, statistically not very likely and virtually impossible to identify which managers will get lucky in advance. Even finding the lucky ones in hindsight often turns into disappointment as even fewer fund managers are able to outperform benchmarks over longer time periods.
That’s why actively managed funds don’t make sense for most disciplined investors seeking the most probable way to realize returns from global markets. Since the majority of active managers consistently fail to deliver market returns over the long haul, paying them a premium (more money) to attempt to do something on your behalf that’s not likely to deliver results doesn’t pass the prudence test.
All Companies Are “Actively Managed”
It’s important to remember that even passively invested mutual funds are, in a sense, being “actively managed”– by the publically-traded companies that make up those indexes or asset categories using their capital and resources to turn a profit. Your investment is being sent to work in ways so complex that even the most advanced research division cannot predict when to best move the money around on a short-term basis.
Once again the SPIVA Scorecard showed that a truly diverse approach that allows for the inherent unpredictability of the market and takes into account its future volatility is your best chance for reaching your investment and retirement goals.
We can certainly show you how. Just call us: 949-600-6060