I worked for almost a decade in the Hedge Fund industry. For a majority of my tenure, like most in the field, I was a believer in active management. Active management is the ability for a talented portfolio manager and a room full of analysts to deliver outperformance on a consistent basis. Outperformance is based on a benchmark index like the S&P 500. The idea is that the market will return what it does on average every year (6-7% historically) but these managers can beat that number with expertise and skill.
There is much prestige and mystique associated with those that are in the business of beating the market. Some claim that they have to the ability to do it on their own; others, that they are able to pick the individual portfolio manager that can.
I do not believe in investing my client’s hard-earned savings using a philosophy that has proven time and time again to be a losing battle.
A study published by Vanguard examined all 1,540 actively managed US domestic equity mutual funds that were available to investors in 1998. Not only did 45% of the funds not survive a 15 year time-frame (they merged with other funds or were closed due to poor performance), but only 18% of the original funds outperformed their benchmark (the market). In addition, 97% of the funds that outperformed over the 15 year time period had at least 5 years of consecutive underperformance. This shows us that outperformance is rare, and consistent outperformance is even more infrequent.
Intermittent outperformance, high fees, and often additional volatility do not allow us to be in control. While we can’t predict the future we know how markets work; focusing on diversification, minimizing fees and tax efficient investing is how we can maximize returns.
This is done through passive investing.
Passive investing is buying and holding. Acknowledging that the market is efficient gives you the ability to divert all attention towards what you can control: fees, taxes, and most importantly your behavior. Ignoring the constant noise generated by the market, media, and those chasing after the next best thing can allow us to spend the time needed on why you are trying to invest in the first place: to reach your financial goals.
Please feel free to reach out to me directly to learn more about Lake Road Advisor’s investment philosophy.