3 Questions Investors Worry Too Much About

July 17, 2015

Should I Be Trying to Beat The ‘Market’?
In the coming weeks, Standard & Poor’s will issue the next iteration of its popular S&P Index vs. Active (SPIVA) report. Past reports can be found at us.spindices.com. In the report, S&P analyzes actively managed mutual funds versus benchmark indexes. In a nutshell, the results have strongly supported index management over time. Morningstar, historically a purveyor of data on actively managed funds, has now begun producing a report that appears to be similar.

While data continue to largely support choosing indexes, the lure of active management (or trying to beat the “market”) is as American as apple pie. Note the bullet points above from Meir Statman. His list of behavioral traits would lead any logical advisor to recommend active management, as it is unquestionably what clients are looking for.

However, we believe in managing portfolios to optimize risk-adjusted return and giving investors their best chance for success. Like a lot of things in life, that might involve giving them what they need, not what their carnal instincts tell them they want.

This goes for us as well, and we execute the same discipline for our own investments, resisting the urge daily to take the governor off and really open up our stock-picking abilities to see what they can do.

I have received numerous comments over the years about active versus index management, both positive and negative. Many longtime purveyors of active management are understandably disturbed by the idea of index investing. Several times I have heard from different sources that "you should be embarrassed to accept average by investing in indexes."

A problem with active management has been that the average is subpar. If investing were golf, investing in the index historically would be like being a scratch golfer and active management would be the local hacker, not the other way around. What many assume is that indexes were average—a frequent mistake. Secondly, many assume that active management would do better than both indexes and the "average."

We believe in using index-based ETFs for exposure to select asset classes. We then focus our energy on asset allocation, ETF selection and monitoring. According to the statistics, we are not alone. ETFs and indexing continue to make large gains in assets compared with classic active management.

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