Broker Check


April 10, 2019

We talk a lot about our investment philosophy and process being evidence-based—meaning we spend a good deal of time researching and partnering with firms that help us implement the most practical academic and industry research we feel will directly benefit our clients. That evidence has driven us away from many traditional approaches to investing such as stock picking and market timing.

With our philosophy, we must be open to new research studies and real-life events to see whether they support or challenge our approach. A recent study and some recent stock market behavior have both provided very confirming information.

We’ll start with the recent stock market behavior. Anyone who reviewed their fourth-quarter statement would know that global stocks declined quickly in the later part of 2018. Our natural reaction to market declines is to get out and seek safety. Yet, we tell our investors time and again that we can’t predict markets—no one can—and that the best approach is to diversify and only hold as much stock exposure as they are willing and able to take.

That suggestion to stay invested and diversify paid off. Global stocks surged in the first quarter of 2019 and are almost back to their record-high levels. Imagine if we gave in to our desire to flee the market when stocks fell? We would have missed out on the robust return in the first quarter. While there is certainly no guarantee that the market will recover following a decline, that has been the historical pattern. Stock returns feel like they come in fits and starts, so we need to be invested during the times of growth to receive the return benefits stocks can provide.

Turning our attention to the recently released 2018 Standard & Poor’s Index Versus Active report, we find very strong evidence that stock-picking active managers’ funds continue to struggle versus their benchmarks. In 2018, only 36% of U.S. large cap managers, 32% of U.S. small cap managers and 23% of international stock mangers outperformed the respective Standard & Poor’s benchmark. The data clearly shows that it’s hard to add value by stock picking.

We find it particularly interesting that active managers performed so poorly when the stock market was down in 2018. Proponents of active management suggest their stock picking helps reduce the severity of  declines, therefore we should invest with them to help moderate the downside. If that were the case, we should have seen better results in down years.

In fact, looking at U.S. large cap manager performance during the last five stock market declines, we see little evidence that active managers are adding value when stock markets fall. U.S. stocks, as measured by the S&P 500 Index, fell in 2000, 2001, 2002, 2008 and 2018, and the percentage of managers who outperformed during those years was 63%, 45%, 42%, 35% and 31%, respectively. Only one of the five years saw managers outperform the index by more than 50%, and the trend is a getting worse!

We were not surprised that this study and recent stock market behavior have confirmed many of our evidence-based investment philosophies. If you have any questions about your investments, need to inform us of any family or work-related changes or want to discuss any financial planning needs, please reach out. We are here to help you reach your financial life goals!

Data source: Morningstar Direct, 2019, and 2018 SPIVA® U.S. Scorecard (S&P Dow Jones Indices). Diversification neither assures a profit nor guarantees against loss in a declining market. All investing involves risk, principal loss is possible. Implementing an asset class investing strategy cannot guarantee a gain or protect against a loss. Indexes are unmanaged baskets of securities in which investors cannot directly invest; they do not reflect the payment of advisory fees or other expenses associated with specific investments or the management of an actual portfolio.