Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
FYI: It’s been one of the worst years for investment decisions on record, almost across the board. With some help from Charles Dickens, let’s take a look at what we experienced. Regards, Ted http://fortune.com/2014/12/24/investing-year-review/
In contrast to the main theme of the referenced article, I do not find that the active investment world has been turned topsy-turvy. The active fund management performance this year is just a slight outlier from its normal dismal record. It is part of the nominal statistical data scatter.
The historical data suggests that active fund managers outdistance their passive equivalent benchmarks only about 30% of the time on an average annual basis. This year, that statistic will likely degrade to a mere 15%. That’s mostly noise and not a seismic shift in the tide.
The 2014 performance of active fund managers is yet another data point that buttresses the wisdom of passive Index investing. Managers who believe they can project primary asset class yearly incremental return changes or, on a finer level, return distributions as a function of sector classification, are chasing a shadow.
By overweighting their forecasts, active managers add to the standard risk of broad market return variations. This is doubling-down in the risk dimension. It is unnecessary.
The evidence that strongly suggests that this is an unfathomable forecasting task is embedded within the historical data sets themselves. It is contained in the various Periodic Table of market Returns. Here is a Link to the famous Callan Periodic Table:
The obvious, outstanding takeaway from these presentations is the completely random character of the annual returns. Predicting these annual position changes with any accuracy is simply not possible.
The commitment that active management makes to their dubious projections explains a significant fraction of their performance challenges. Management and trading costs add to those challenges.
So, I take issue with the articles title “2014: The Year that Nothing Worked”. Some things have worked quite well. Overall, the markets are returning rather normal rewards in various pieces.
Active market investment wisdom seems ephemeral. Those few who enjoy some annual success seem to be one-trick ponies. It is tough to repeat superior excess returns. This too has a firm statistical basis. Market heroes over time are a very rare breed. The unpredictable nature exhibited by all sorts of Periodic Investment Tables illustrate why this is so.
These data support the need for broad market diversification. These data document the folly of active fund management once again, however, this time with an exclamation point for emphasis.
As you know, I don’t practice traditional diversification. So, for me, this has been a good year – just being long the market. Recently I read some adviser’s comments regarding this year’s market active that echoes this article. He said something like - “If a portion of your portfolio is not losing value, you’re not diversified.” (Since that’s not a direct quote, I don’t know if it needs parentheses. One of these days, I’ll have to learn that.)
While this philosophy may satisfy the average low-information retirement investor, to me it seems a bit like a circular firing squad or antiperistalsis.
As to your previous posting regarding Rotholtz - I don’t take exception to “universal rules” and don’t believe that these congeries are wrong or irrelevant. However, a summation of these rules and others like them always proves to be the traditional advice - be a conservative, diversified, long-term investor.
To me, diversification is like making an “exotic” wager at the house track. In this case, your portfolio is your bet.
“Exotic wagers allow you to make multiple bets on multiple horses in a single wager. Exotic wagers are generally much more difficult to win than straight wagers, require an advanced degree of skill and knowledge in horse picking, and are more expensive. However, the payoffs on exotic wagers are much greater than straight ones.”
Yes, the potential rewards can be greater – but the odds are against you. So, I prefer taking the odds rather than laying them.
Or, as my brother-in-law says, “You may have three balls in the air at the same time, but that doesn’t mean that you’re juggling.”
As to the long-term, I prefer to manage the short term and let the long term take care of itself.
All of which means that I’ve been touting indexing to my students for nearly 20 years and ETFs for maybe 10 years. And, of course, moving averages.
While I still have your attention, I want to thank you for your high standard of comments over the years.
Thank you for gracing this discussion. Your welcomed contributions are always thought provoking, sometimes provocative, but consistently add to an investor’s perspective.
Thank you also for your generous and kind words with regard to my own submittals. I try very hard to make them accurate, informative, and stimulating.
Although we differ in several dimensions of investing policy and practice, our infrequent exchanges have been respectful and on-target subject wise. Your comments are cogent and often actionable. I only regret their infrequency.
Perhaps the market writer that you semi-quoted was Morgan Housel, perhaps not.
A few days earlier, I posted his WSJ article titled “16 Rules for Investors to Live By”. His rule number 16 from that piece is: “You are only diversified if some of your investments are performing worse than others.”
Other financial writers and advisors have published a score of perturbations of this popular investment rule. By the way, I too do not know the accepted rules-of-the-road with regard to near quotes.
I agree completely with your observation that much of market writings can be distilled down to a few golden guidelines. Long term patience, real diversification with products having low and persistent correlation coefficients, and a conservative money management plan are excellent starting attributes for successful investing. These are somewhat dull platitudes, but historical data demonstrates that they work. I try to practice them.
Regardless of your own investing proclivities, I admire your class teaching discipline. I’m sure your students learn much from the principles that you share with them. Teaching in a neutral manner, without taking a strong adversarial position, is a difficult balancing task. Familiarizing your students with the odds/likely rewards tradeoffs will make them better investors. Congratulations.
I’m not sure I understand your specific meaning, but you introduced a terrific new word, “antiperistasis”, to me. Once I get to comprehend its nuanced definition, I’ll try to add it to my vocabulary. That’s likely to take time.
Great fun. Please don’t be a stranger. I’ll profit from your postings as I have in past exchanges. So will the MFO discussion panel.
I am one of those that also likes red and green (if you live in New Mexico it is a must. Has to do with chile.) I have a wide range of holdings that include utilities, reits, health care and biotech, plus the usual suspects of dividend growth and large value, etc. etc. If I had not been diversified this year, would have missed out on the 25% gain in utilities and reits which I normally do not expect to excel in good years. Of course, I am in the red on intl and emerging market, but you never know when they will take off, thats why I leave them alone.
Comments
In contrast to the main theme of the referenced article, I do not find that the active investment world has been turned topsy-turvy. The active fund management performance this year is just a slight outlier from its normal dismal record. It is part of the nominal statistical data scatter.
The historical data suggests that active fund managers outdistance their passive equivalent benchmarks only about 30% of the time on an average annual basis. This year, that statistic will likely degrade to a mere 15%. That’s mostly noise and not a seismic shift in the tide.
The 2014 performance of active fund managers is yet another data point that buttresses the wisdom of passive Index investing. Managers who believe they can project primary asset class yearly incremental return changes or, on a finer level, return distributions as a function of sector classification, are chasing a shadow.
By overweighting their forecasts, active managers add to the standard risk of broad market return variations. This is doubling-down in the risk dimension. It is unnecessary.
The evidence that strongly suggests that this is an unfathomable forecasting task is embedded within the historical data sets themselves. It is contained in the various Periodic Table of market Returns. Here is a Link to the famous Callan Periodic Table:
https://www.callan.com/research/files/757.pdf
Here is a Link to the slightly less famous MSCI Sector performance Periodic Table:
http://www.msci.com/resources/factsheets/MSCI_USA_Sector_Indices_Returns_and_Volatilities.pdf
The obvious, outstanding takeaway from these presentations is the completely random character of the annual returns. Predicting these annual position changes with any accuracy is simply not possible.
The commitment that active management makes to their dubious projections explains a significant fraction of their performance challenges. Management and trading costs add to those challenges.
So, I take issue with the articles title “2014: The Year that Nothing Worked”. Some things have worked quite well. Overall, the markets are returning rather normal rewards in various pieces.
Active market investment wisdom seems ephemeral. Those few who enjoy some annual success seem to be one-trick ponies. It is tough to repeat superior excess returns. This too has a firm statistical basis. Market heroes over time are a very rare breed. The unpredictable nature exhibited by all sorts of Periodic Investment Tables illustrate why this is so.
These data support the need for broad market diversification. These data document the folly of active fund management once again, however, this time with an exclamation point for emphasis.
Best Wishes for the coming New Year and beyond.
As you know, I don’t practice traditional diversification. So, for me,
this has been a good year – just being long the market.
Recently I read some adviser’s comments regarding this year’s
market active that echoes this article. He said something like -
“If a portion of your portfolio is not losing value, you’re not diversified.”
(Since that’s not a direct quote, I don’t know if it needs parentheses.
One of these days, I’ll have to learn that.)
While this philosophy may satisfy the average low-information
retirement investor, to me it seems a bit like a circular
firing squad or antiperistalsis.
As to your previous posting regarding Rotholtz -
I don’t take exception to “universal rules” and don’t believe that
these congeries are wrong or irrelevant.
However, a summation of these rules and others like them always
proves to be the traditional advice - be a conservative, diversified,
long-term investor.
To me, diversification is like making an “exotic” wager at the
house track.
In this case, your portfolio is your bet.
“Exotic wagers allow you to make multiple bets on multiple horses
in a single wager. Exotic wagers are generally much more difficult
to win than straight wagers, require an advanced degree of skill
and knowledge in horse picking, and are more expensive.
However, the payoffs on exotic wagers are much greater
than straight ones.”
Yes, the potential rewards can be greater – but the odds are against you.
So, I prefer taking the odds rather than laying them.
Or, as my brother-in-law says, “You may have three balls in the air
at the same time, but that doesn’t mean that you’re juggling.”
As to the long-term, I prefer to manage the short term and
let the long term take care of itself.
All of which means that I’ve been touting indexing to my students
for nearly 20 years and ETFs for maybe 10 years. And, of course,
moving averages.
While I still have your attention, I want to thank you for your
high standard of comments over the years.
Best wishes,
Flack
Thank you for gracing this discussion. Your welcomed contributions are always thought provoking, sometimes provocative, but consistently add to an investor’s perspective.
Thank you also for your generous and kind words with regard to my own submittals. I try very hard to make them accurate, informative, and stimulating.
Although we differ in several dimensions of investing policy and practice, our infrequent exchanges have been respectful and on-target subject wise. Your comments are cogent and often actionable. I only regret their infrequency.
Perhaps the market writer that you semi-quoted was Morgan Housel, perhaps not.
A few days earlier, I posted his WSJ article titled “16 Rules for Investors to Live By”. His rule number 16 from that piece is: “You are only diversified if some of your investments are performing worse than others.”
Other financial writers and advisors have published a score of perturbations of this popular investment rule. By the way, I too do not know the accepted rules-of-the-road with regard to near quotes.
I agree completely with your observation that much of market writings can be distilled down to a few golden guidelines. Long term patience, real diversification with products having low and persistent correlation coefficients, and a conservative money management plan are excellent starting attributes for successful investing. These are somewhat dull platitudes, but historical data demonstrates that they work. I try to practice them.
Regardless of your own investing proclivities, I admire your class teaching discipline. I’m sure your students learn much from the principles that you share with them. Teaching in a neutral manner, without taking a strong adversarial position, is a difficult balancing task. Familiarizing your students with the odds/likely rewards tradeoffs will make them better investors. Congratulations.
I’m not sure I understand your specific meaning, but you introduced a terrific new word, “antiperistasis”, to me. Once I get to comprehend its nuanced definition, I’ll try to add it to my vocabulary. That’s likely to take time.
Great fun. Please don’t be a stranger. I’ll profit from your postings as I have in past exchanges. So will the MFO discussion panel.
My Very Highest Regards.
Good conversations, thanks