This behaviour is not unique and many people reading this article will be able to recall a similar experience to the laid-out scenario. The majority of us, as humans, are hard wired the same way. We suffer from a lack of patience and invariably feel that we need to be doing something. It is almost as if doing nothing is negative but there are many moments, such as when in traffic, where doing something actually has the negative impact.
This holds true for investing. Investors are often reluctant to sit on their hands, questioning every decision that they have made, constantly looking at other investment alternatives as being the ones that really work. The most common example that occurs are investors exiting out of the stock market and converting their holdings into cash, only switching back once the stock market has shown significant returns, in fact often at a higher (more expensive) re-entry point. Humans by nature are bad investors.
The example I used was one of equities or cash but there are so many more asset classes out there, so many currencies to consider, and so many places in the world to invest. There are a huge number of decisions to be made, all with the risk that those decisions are then unwound at the wrong moment in time. It is for this reason that the passive investment solution (ie making as few investment decisions as possible) has been the better performer and why internationally passive investments has received by far and away the lion’s share of new investment flows.
Every six month’s S&P Dow Jones Indices release their SPIVA scorecard. For this scorecard they compare actively managed funds against their appropriate benchmarks, with research conducted across a number of regions and number of different categories. In the US Large Cap sector, which is where many of the “mega” active management funds are located, the SPIVA scorecard indicates that only 27% of them managed to outperform the S&P500, on a net-of-fees basis.
In other words, close to three quarters underperformed. The benchmark of the S&P500 is a passive benchmark, the 500 largest and most liquid companies listed on a US stock exchange are included. There is no discussion over whether Apple is a better business than Microsoft or whether Amazon will continue to ship products.
The SPIVA scorecard tells us further that the number of actively managed funds outperforming on a 20-year basis drops to a paltry 6%. The fact that only a minority of active managers has led to the current dominant investment thought of rather “just buy the market”. As Jack Bogle, the founder of The Vanguard Group, famously wrote, “Don’t look for the needle in the haystack. Just buy the haystack!” Jack Bogle is famous for creating the first index fund – a fund whose constituents are determined by what is contained in the benchmark index, with no deviation from that index. Since the start of his fund, we have seen an explosion in investment products that track indices. The vast majority of the $10trn ETF industry are assets invested in ETFs that track indices.
A good investment manager (and there are many great investment managers out there) will make a number of correct investment decisions in their lives, and across the period where the investor has allocated capital to them. It is the few poor decisions that they make (similar to changing lanes) that hampers performance and penalises investors. Sometimes the option that requires less effort produces the best result.
This article was first published in Cover Magazine:
https://cover.co.za/how-many-investors-actually-outperform/
Magwitch Offshore is a leading provider of Global Balanced ETF portfolios with products in all major currencies. Magwitch utilises an advisor distribution model and their portfolios are available through offshore endowment structures provided by some of the larger Insurers.