Desperate Times


Shakespeare could not have been more correct when he observed, "desperate times breed desperate measures."

There's a lot of desperation in the securities industry -- and for good reason. You're no longer a clueless victim and are abandoning active management in droves. According to an article in The Wall Street Journal, for the 3-year period ending August 30, 2016, $1.3 trillion flowed into passive strategies. Active strategies lost almost 25% of their total assets under management over the same time period.

You've figured out that investing in actively managed funds, stock picking and market timing enriches the securities industry at your expense. You understand you are paying for expensive funds that are likely to underperform a less expensive index fund and that performance of the "winning" funds is unlikely to persist.

You're now aware of the "low and declining odds that active management will outperform", as described by Larry Swedroe in this blog post.

The ramification of your knowledge is seismic for the financial media, your broker and actively managed funds. They're fighting back with a series of desperate acts, designed to dissuade you from abandoning them. Here's a sampling:

The financial media

If intelligent and responsible investing becomes mainstream (as it appears to be headed), watching breathless reporting from the floor of the NYSE, and listening to discredited pundits pick stocks and predict the future of the markets, becomes a counter-productive, irrelevant activity. This means viewership will continue to decline and revenues will erode.

The financial media is responding by largely ignoring the compelling data and doubling down on baseless stories that it hopes will keep you watching. Examples abound, but a recent blog on CNBC entitled: "Investors worried about President Trump should buy these stocks, Goldman Sachs says", is illustrative.

Responsible journalism would require disclosure of the track record of the "strategist" quoted in the article. The underlying premise is also flawed. If an investor is genuinely "worried" about President Trump, the investor shouldn't be picking stocks. Instead, he or she should have no stock market exposure.

But that sage advice doesn't fit the false narrative that some "strategist" can predict which stocks will outperform in the future.

Don't be fooled.


When is the last time your broker recommended buying a globally diversified portfolio of low management fee index funds?

That's not how they make money. They want you to believe they add value by selecting actively managed funds and outperforming stocks. Now that you've figured out this isn't true, you have no reason to use them. You can purchase index funds, including ETFs, directly from low cost providers like Vanguard, Fidelity and Schwab, or use cost-effective robo-advisors, like Wealthfront and Betterment.

There is no reason to use a traditional broker or an advisor who claims the ability to "beat the market."

You can expect them to inundate you with "advice" like this gem from JP Morgan, in which it "upgrades" Praxair (NYSE: PX) "to overweight from neutral, citing greater demand ahead because of Donald Trump's economic policies."

Since the information about Trump's economic policies is public, it's already factored in the share price of Praxair (and all other stocks). There's no logical reason to believe this stock is mispriced at present.

Stating otherwise is a desperate act.

Actively managed funds

If everyone understood the low odds of actively managed funds outperforming a comparable index fund, many more funds would go out of business.

Vanguard's chief, William McNabb, correctly observed "Over the decade ended in 2015, 82 percent of actively managed stock funds and 81 percent of active bond funds have either underperformed their benchmarks or shut down."

The active fund industry will continue to obscure this data with the help of financial journalists who keep hope alive with silly articles like: "Why 2017 could be the year stock pickers regain their edge."

This article validates the view that active investing is "the triumph of hope over experience."

Active managers dread the possibility you will learn that a comprehensive analysis of major fund families found almost all of them underperformed comparable index funds from Vanguard and passively managed funds from Dimensional Fund Advisors.

This analysis reached this telling conclusion: "This data serves as strong evidence that, even though the markets may not be perfectly efficient, investors in most actively managed funds will not benefit from efforts to exploit supposed inefficiencies, especially once taxes are considered."

Expect active managers to fight back with "advice" like "Active or passive investing? Try both."

Here's what it won't disclose: The most likely result of "trying both" is that your returns will be less than if you had limited your investments to only index funds. You could get lucky, but the odds are against you.

The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.

Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

Get Dan's investing insights by signing up for his free, weekly newsletter here.