Has anyone ever asked you, “Hey, what do you think of Crossfit?” Crossfit is a popular fitness program that involves many types of exercises, including a form of powerlifting. In a recent conversation I had with a friend, they commented that Chiropractors love Crossfit because it provides them with so much business! Very similar to Orthopaedics loving 40 plus year olds that still play competitive basketball! The challenge is that people who aren’t really knowledgeable about lifting weights are jumping into these intense programs with highly technical exercises and bad results are happening WAY too frequently. In some cases there may be a short period of positive results but in the end an injury can negate all or most of the progress. For further verification, just search “Crossfit Fails” on Youtube.
Investing is similar; there are many well-intentioned investors and fund managers who think they know what they are doing, but in the end, too many mistakes are made and the cost is far greater than the benefit. According to a recent Wall Street Journal article, “Stock Pickers Have Tough Time in 2014” 74% of actively-managed U.S. large company mutual funds are underperforming the S&P 500 index year-to-date. A similar Yahoo article points out that this is, “a disheartening reversal from 2013 when 50% of actively-managed funds were able to keep up with the S&P.” Research would suggest this really isn’t news at all.
Vanguard recently released data for all five year periods ended 1998 through 2013 showing the percentage of actively-managed funds that underperformed their index. For large cap blend funds, in all but two of the 16 time periods measured, more than 50% of actively managed funds underperformed their index. On average, 68% of the funds underperformed their benchmark for those 16 periods. The reasons for this are numerous, including turnover and market timing.
Active management is an attempt to outperform a benchmark by trying to predict the future through a) selecting a small group of stocks that a fund manager expects to perform better than the market as a whole and/or b) timing when to enter or exit the market. This significantly increases costs and can cause investors to miss significant returns. As an example, many active managers have let cash pile up over the past six to twelve months expecting a market correction. That cash has missed out on over 7% growth that occurred in large US stocks in the last six months and almost 25% in the last twelve months.
The data continues to support Foster Group’s philosophy of making the market your ally rather than your adversary and that timing the market is a dangerous exercise.
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