I don’t know whether to laugh or become incredulous at the latest creative and very expensive advertising campaign by one of the financial industry giants in their full-frontal assault on a very popular form of investing. By the way, who do you think pays for all that expensive advertising?

Before getting too deep into the weeds it may help to review a couple of definitions. Active management is the practice of continuously buying and selling stocks trying to gain an edge over the returns offered by the broad equity markets or sectors.  Passive management, also called indexing, seeks to build a portfolio of funds that mirror (as closely as possible) different baskets of companies called indexes.  For example, the S&P 500 Index is a group of 500 of the largest companies and is often considered the best representation for the large-cap U.S. stock market.  A traditional active manager will select from the list of 500 and periodically re-shuffle the deck based on his or her belief of which companies or sectors will be the best performers.  A so-called “passive” manager will instead invest in the best-fit fund (or funds) that most closely tracks the S&P 500.  It is a buy and hold strategy, but there is nothing passive about the manager’s effort that goes into researching, constructing and periodically re-balancing such portfolios.

Back to our discussion.  In an almost desperate attempt to stem the avalanche of investor defections from the overpriced, over-hyped and perpetually under-performing active management industry, this advertising campaign laughably insinuates that people who invest in index funds are somehow settling for average and thus leaving vast sums of money on the table that could have been garnered by the “experts” who possess superior security selection or market timing skills.  Is that so?  Well, let’s look at the latest results which might come as a surprise to the millions of investors who continue to believe that sales pitch.

Twice each year, S&P publishes a report in which it compares the performance of actively managed funds to their best-fit passive index.  The report is called the SPIVA Scorecard (S&P Index vs. Active Management) and is available on-line for anyone interested in fact-checking.  The latest report, updated for the past 1, 3, 5, 10 and 15-year time periods through 2016, is further condemnation of the active-management industry and the oversize fees it charges to continually under-perform. 

Take the U.S. market as an example.  In all time periods measured, all fund groups underperformed their benchmarks and, for the most part, the longer the time period, the worse the results.  Not to bore you with too much data but here are a few examples to ponder.          

Percentage of funds that underperformed their respective benchmarks.

          Source: SPIVA 12/31/16

What is amazing about this latest report is that it shoots holes in the industry’s claim that it is easier for mid and small-cap managers to beat their indexes because those markets are less efficient than large-cap markets. This is theoretically because there are more analysts following and reporting on large companies making it more difficult to find value as every “rock” has been turned over in their search.  Also amazing is that the longer you invest, the worse the results become.  Since most investors are investing for time periods greater than one year, this report should feel like an earthquake.

If this was a sports team, the entire coaching staff would have been fired long ago, yet investors continue to ignore the evidence or believe that their personal financial advisor has access to some smart money guru that is unavailable to, or unknown by, the rest of the world.  So, to answer the ad’s question – “Why settle for average?”, because the average index fund has out-performed the clear majority of actively managed funds, yet at a lower cost and less risk.  That is anything but average! 

As important as this debate over investment philosophies may be, it misses the more critical point - that being your ability to fund your life’s goals.  Simply selecting the most appropriate investments (active or passive) will mean little if you didn’t save enough or if you over-saved and die with too much money in the bank, having never really lived.  Or, because you never determined the most appropriate risk-return balance for your unique situation, you learned too late, that you had taken more risk than you could tolerate and sold out at a market bottom.  You may have been unwilling to spend the money required to partner with a professional advisor whose sole mission was your success.  On and on it goes, never ending.  There are many reasons for failure but they won’t matter because once you fail the game is over.

Financial success is much more an art than a science as every investor is unique and what fits one person will not fit another.  It requires a lifetime of prudent actions including researching, evaluating, planning, saving, executing, monitoring and tweaking as needed for your individual situation.  As you can see, there is nothing passive about the process. 

Additionally, since investor behavior is the single biggest deterrent to success, an inability to control your emotions in response to market conditions can wreck years of progress. This is when a long-standing partnership with an experienced, objective team of financial advisors who know you intimately can mean the difference between success and failure.  Wealthview Capital partners with investors who understand and embrace these core principals.