The Fix The Investments Series

By the middle of 2017, more than a third of all investment assets in the U.S. were in passive funds. That’s a substantial jump from just a decade before when it was about a fifth.

More than 90% of active managers did not outperform their benchmarks over a fifteen year period, 2001-2016. They also fell behind in one year, three year, five year and ten year periods.

That’s ugly.

We can continue to site numbers that validate the massive inflows of money to passive funds and the massive outflows from actively managed funds, but no matter which way activists try to spin it, that giant sucking sound they hear is money in motion. Can you say, “bye-bye.”

You have to be very smart or very lucky to be a consistently good stock picker, but apparently the vast majority of managers are neither, which makes this final statistic all the more revealing: 100% of active managers make exorbitant wages. Sure, there are some standout active managers. Managers of distinction, you might say. Managers who earn every cent they’re paid. They bring home the alpha. But even they stumble. There is no surefire guaranteed way to make money every year in the markets. If there were we would all be fabulously wealthy. Like those active managers.

But there is absolutely a surefire guaranteed way to not make less than the market every year. 

What is this wonderful strategy called? 

Go to the head of the class if you said “passive investing.”

Passive investing is a long term strategy to build personal wealth. It is the antithesis of stock picking. It’s more about “being the market” than beating the market. The emphasis is on employing the major themes of successful investing–asset allocation, diversification, asset location, reducing costs, low turnover, tax efficiency and so forth–rather than trying to do the seemingly impossible: consistently picking winners. The proverbial stopped clock may be right twice a day, but personal investors? Not so much. 

With the surge in low cost options, particularly exchange traded funds (ETFs), index investing can help investors put more of their energy into working on building intelligent investor traits like self control and stripping their emotions out of their trades. Check out just some of the reasons why the passive approach using exchange traded funds is the superior way: 


Active mutual funds and separately managed accounts are expensive, yet they often fail to deliver the goods. With costs ranging from 1.5% to 3% annually, often in addition to front end sales loads of up to 5% or more, managers simply fail to deliver returns on their “excess alpha” promises. This active option can be ten to more than thirty times more expensive than using simple market-tracking ETFs. Active funds are a very expensive way to lose money!


Diversification at many levels can be easily achieved with ETFs. Asset class level (stocks, bonds, alternatives); sub-asset class level (large cap, mid cap, small cap, domestic bonds, global bonds); geographic level (US, foreign, single country, regional), specific industry or broad sectors level (regional banks or finance, social media or tech, cyclical or non), and even alternative asset classes (gold and silver, real estate,  agriculture and timber). There are virtually limitless ways to construct your highly personalized portfolio.


Stock picking is risky business. This is where ego and overconfidence often team up to give you a real good ass whipping! Instead, let the indices do the work for you. Decide which ETFs and allocation model will work for you and allow you to attain your money goals, while reducing overall portfolio risk. 


Unlike mutual funds, ETF investing allows you to make changes to your portfolio intraday, meaning you can buy and sell in the open markets just like you would an individual stock. Selling a mutual fund is like blindly pulling the trigger, having to wait until after the market closes to see what price you got. While we are not advocating frequent trading, there are those times you need to reduce or increase a position and lock in the price you want without having to trade blindly.


The markets are efficient, meaning that by the time you see a stock price, just about all known information has been priced into it. It is nearly impossible for you to be more informed than the market at any given point in time. So, BE the market, and never make less than the market. Efficient. Cheap. Good!


Find your zen and BE the market. Zen is about dropping illusion and seeing things as they are, without the distortion created by your own thoughts. Or worse, your emotions.

7-CHEAT THE TAXMAN (legally…of course)

In taxable accounts, you want your earnings to be treated as long term capital gains. Period. You want to be the person who decides when you want to pay them. Period. Mutual Funds (you remember, that expensive, overactive, underperforming group of investments) have a very nasty habit of sending you an income tax bill, even when your fund is in the red. In other words, they pass the cap gains (even the more expensive short term ones) on to you, the shareholder, because they realized a gain in a given security, even though the entire portfolio is down. Unless the account is an IRA or ROTH, or some other tax-qualified account, I think this really sucks, but let me know if you think that’s a good idea.


Institutions love ETFs. Pension funds,insurance companies, endowments, hedge funds, money managers…all use ETFs in a greater and greater proportion every year. Why? Well, for all the reasons above, and more!


Leave a Reply

You have to agree to the comment policy.