In another article we talked about John Bogle and the dominant rise in passive investing. This time, I’m going to take off from that point and talk about two timely and remarkable pieces of news that relate DIRECTLY to you and your portfolio with Wellspring.
First, if you will recall, the essence of the referenced article is that Wall Street’s genius fund managers are generally full of crap (that’s a purely technical term). It does not matter if you have $10,000 or $100,000,000 dollars, we ALL have to figure out how to invest it. The financial services industry has historically said that to find the right stocks, at the right price, in the right industries, at the right time, to propel your portfolio to optimal success levels that you need to hire – well, you need to hire them. The depth and complexity of the market are so inscrutable that no mere human being can do it, but that they are not mere human beings. What Mr. Bogle did was to research their efficiency and prowess. He found it not only lacking…he found it non-existent. For 50 years this research result has been repeated over and over, and resulted in much new money (since 2008, ALL new money) flowing into passive funds. Keep in mind a passive fund doesn’t select between Boeing and Airbus, they buy them both. It does not decide between Facebook and Apple, it buys them both. Though index funds are not necessarily easy to construct, you must admit this approach sounds really simplistic — until you leave the table with more money than the other guy. As Mike Tyson famously remarked; “Everybody has a plan ‘til they get punched in the mouth”.
One of the remarkable items I want to comment on is that our clients, are invested passively, and again by the research certainly would do better than most people. What you may not necessarily realize is that we very reluctantly came into this industry for one and only one reason; we could not get the best passive funds that existed. Our research led me to the family of Dimensional Fund Advisors (DFA), a money manager, who happened to also spring into being about the same time as John Bogle. In their nascent days they focused on small capitalization stocks only, but the founders (David Booth, Rex Sinquefeld) did not go the retail route that Vanguard did, they stayed with the private side and focused ONLY on company pension plans and institutional buyers. Later, 20 years after they started, they allowed a narrow group of closely vetted financial advisors to have access to their funds for their clients. However, I want to report a recently released result related to their performance. Because the news is so startling, let me clearly lay it out;
- The likelihood of the average actively managed fund falling short of its’ benchmark is 55-98%[i] (i.e. never as good as flipping a coin).
- A well-constructed Index fund’s performance will BE the benchmark, minus a fractional percent for management expenses.
- A well-diversified portfolio of index funds outperform a portfolio of actively managed funds a jaw dropping 92-99%[ii].
- ..and here’s the “Drop Kick Me, Jesus, Through The Goalposts Of Life[iii]” stunning fact…DFA funds have outperformed their respective benchmark 86% of the time over the past 15 years[iv]!!! That is stunningly difficult to achieve.
Perhaps in a future writing I’ll explain why that outperformance exists (nine primary reasons), but for now, I’ll tell you that they are logical and, most importantly, repeatable. It is immensely gratifying to be able to state in hindsight all our research was worthwhile; there is no bias here or waiting for another shoe to drop; you win!
Speaking of Winning; The second remarkable fact for this communication…regards a Presidential election. Don’t worry, we’re not getting political here (mama didn’t raise no fool). What I want to point out for your benefit and a good night’s sleep is that in the ensuing 4-year period post-election the stock market does EQUALLY well in both Democratic and Republican victories. Literally: indistinguishable.
From the above graph you’ll see the average returns is EXACTLY the same no matter what party wins. We undoubtedly have a hugely divided populace on who should get elected, and why they should get elected, and why the other person should never be elected…but the truth is…the stock market doesn’t care. Whoever wins the White House, corporations are expected to perform financially, to hire good people, to create new products / services and sell them to willing buyers. The hidden message to his section is timing the market is NEVER a good idea, and trying to time it whether your favorite politician gets into office is simply an exercise in folly and futility.
These two remarkable facts are meant to educate you, and unabashedly tell you that sometimes you can overthink something. As a society we probably need to do more thinking on some subjects, but on investments, how you are invested is simply spot on to industry best practice. The overarching message is remarkably simple, but very, very hard to do in practice; separate your emotional quotient in investments from your intellectual one. Please realize that your insights into any stock, or bond, or politician or country naturally brings with it your bias. And when you let your emotions control your money, you are likely on a road to perdition and the only thing you will achieve is regret.
[i] Standard and Poor’s Indices Versus Active Funds (Equity Data, 5-year ending June 30, 2016)
[ii] “The Power of Passive Investing” (Richard A. Ferri, John Wiley and Sons, Inc., 2011)
[iii] Bobby Bear, Country Ballad
[iv] Components of Net Equity Returns (The Dimensional Advantage, January 1, 2001 – December 31, 2015)