Again! The message is clear.
Chalk up another win for index investing in the active vs. passive management debate. Standard & Poor’s semi-annual update on how often fund managers beat their benchmarks once again shows that paying higher fees for outperformance is usually a losing proposition.
The latest S&P Index Versus Active (SPIVA) scorecard reveals that with few exceptions, active fund managers underperform their respective benchmarks the great majority of the time. Frank Luo, senior director of S&P Indices Global Research & Design, sums it up like this:
Over the past three years, which can be characterized by volatile market conditions, 64 percent of actively managed large-cap funds were outperformed by the S&P 500, 75.1 percent of mid-cap funds were outperformed by the S&P MidCap 400 and 63.1 percent of the small-cap funds were outperformed by the S&P SmallCap 600.
There are many who are lamenting the impact that high frequency computer-based trading is having on the market. They certainly can impact the market on a short term basis, but impact of long-term market prices and trends is probably minimal.
The days of you trying to make a buck actively trading in the stock market are over.
Individuals don’t stand a chance anymore because they are largely competing against rational machines often guided by herd-like irrational forces. The robots can rule in the blink of an eye.
I’m not spouting lines from an Isaac Asimov novel, but citing reality. The machines and people who program and profit from them have won — for now.
I knew it was over for human traders when I heard that high-frequency trading firms were hooking up their data lines directly to exchange computers to gain an extra hundredth of a second in execution time.
High-speed programs are designed to move millions of shares in a fraction of a second to take advantage of small movements in securities prices. These algorithms are ideal Wall Street workers. They don’t need health insurance and you don’t have to pay them bonuses to help finance their Lamborghinis or homes in the Hamptons.
An interesting article on the future of gold (one that I am aligned with):
I’ve had people tell me recently that “It’s Different This Time” when talking about the recent market declines.
The following quote summarizes my thoughts about how the current situation should impact your investment strategy:
“The four most dangerous words in investing are ‘it’s different this time.’” Sir John Templeton, Legendary Investor, Money Magazine, Fall 2002, P. 25
The following article by Allan Roth makes a great case for staying with your investment strategy.
Please send me your comments and questions.
Lately I’ve been hearing, a lot, that this stock market decline is different. So different, apparently, that many investors are actually changing their investment strategy based on this belief. Let’s examine the argument.
It really is different this time
Never before in our modern history have we had major European governments on the verge of default. Nor has the US ever experienced a downgrade of the sacred US Treasury, as was recently done by Standard and Poors. Indeed, the whole belief in paper currency seems to be in question, which is likely why investors have flocked to gold.