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Stuart Ritchie

By: Stuart Ritchie

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June 13th, 2019

If 92% of active funds don’t beat the market, why are people still investing this way?

Investment | Financial Education

It’s mind boggling active investing still survives.

Despite all the studies proving its underperformance.

Yet many investors choose to miss out on new opportunities.

Adamant that a tech-driven, science-based, systematic approach to making more money is not for them.

Why?

As a financial planner, I check market news daily.

Not because I want to chase performance…

(Or get my clients to)…

But because I’m interested in seeing what the media’s talking about.

Often, active investing dominates the headlines.

(Not surprising, since it’s regarded as more exciting that passive investing).

passive-active-tortoise bg 2

But lately I’ve seen an interesting angle…

The media’s saying it’s a “good time” to invest in actively managed funds.

Perplexing.

Why is now a “good time”?

What’s changed?

One investor asked our opinion on the recent hype…

Clearly sceptical and wanting an unbiased view enabling him to make an informed decision.

(And put any debates with family and friends to rest).

 

A look at the data

This year, for the 9th consecutive year…

Active fund managers underperformed the market.

The data shows, the number of fund managers able to beat the market shrinks over time.

Meaning long-term investors with an active fund strategy, are most likely left with dismal results.

Underperformance S&P

Fund manager underperformance

In 2018, it seemed time was running out for active funds.

Morningstar Direct reported outflows of $211.8 billion from actively managed U.S. funds in 2018 alone.

Passive funds saw inflows of £200 billion.

Investors realised that despite promising better returns during periods of volatility…

Active funds were still unable to deliver during the 4th quarter of 2018.

(A volatile time in the markets, as we know).

So why the sudden “renaissance”?

 

There’s a logical explanation

A recent paper authored by J.B. Heaton and Ginger L. Pennington, explains the persistence of active management.

They believe it’s down to a pattern of human reasoning called conjunction fallacy.

Here’s an example in a famous quote:

The harder you work, the luckier you get”.

In most areas of our lives, we experience a positive relationship between hard work and reward.

Time spent with our children creates better relationships.

The more we train, the easier the marathon.

We expect that pattern to exist in other areas too.

Some investors believe investing should be stressful – that way they feel they are doing something.

Simply doing nothing seems incomprehensible.

There’s also the idea that the higher the price, the better the product.

High price doesn't mean high quality

For wealthy people, accustomed to expensive cars, luxury homes and designer goods…

Higher prices usually equal better products.

But not always.

And certainly not when it comes to active investing.

Why?

Because of the high fees and charges and the constant churning of funds eating away at returns.

Each reaction equals a transaction.

 

Low-cost investing makes better sense

Sure, it’s boring and won’t make the news.

And you’ve likely never heard of the fund company we work with.

They do no advertising.

But they’re the eighth largest in the world…

Run by a “who’s who” in the world of financial economics, along with Nobel Prize-winning laureates Eugene Fama, Robert Merton and Myron Scholes.

Together, they have engineered a new opportunity to help investors make more money and ultimately live a more fulfilling life.

A lower cost, systematic opportunity.

To smile smugly inside when others rue their losses.

What could be better than investing your money, saving on costs, spending your time doing other more important things and then reaping the rewards later?

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P.S. Tell me what’s bothering you. My colleagues and I will tell you what we think – for free.

About Stuart Ritchie

Stuart Ritchie is a Chartered Financial Planner, APFS, Chartered Wealth Manager, Chartered FCSI

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