Being Smart with $$ -- Don't Be Fooled By Claims That Active Management Will Win In Volatile Times

Don’t be fooled by claims that active portfolio management can navigate volatile markets and make you money.  Mutual fund companies and money managers often say that in normal times it is hard to beat an unmanaged index fund that simply owns a sector of the market without trying to pick winners and losers.  It is hard to beat those index funds because their fees are so much lower than that charged by the active managers.  But the managers say that their value may come in times when the markets are volatile and they can navigate the ups and downs to save you money or make you money.  The trouble is that these claims are mostly marketing.  I have recently reviewed several portfolios with actively-managed, high-fee funds and the majority have done worse than low-cost index funds since the beginning of the year.  A just-completed review of a portfolio with 13 actively-managed funds revealed that 9 performed worse than an index fund offered in their same category and only 4 performed better since January 1.  What’s more concerning is that the average underperformance of the 9 was far greater than the outperformance of the 4 such that the entire portfolio would have had far superior results since the beginning of the year if it were entirely invested in low-cost index funds.  The active managers have the ability to hold less in stocks and more in cash if they think the market is going to fall giving them the ability to not only try to pick winning stocks and bonds but also to reduce their exposure to the markets if they see bad times ahead.  But these funds, which are managed by several of the largest and most respected mutual fund companies, failed to navigate the markets in the way they claim they can.  These 13 funds don’t represent the entire universe of mutual funds but they do make the point that high-fee, active management may not be able to provide the magic the big managers claim they can.  When you buy low-cost index funds, you can count on getting the returns of your target market sector less an almost negligible fee and you don’t have to worry that a manager will guess wrong and cost you money.  A long-term plan does not include guessing the direction of the market but instead stays the course and enjoys the growth of assets over the decades.  Don’t be fooled by the marketing claims.

Larry Pike, CFAClient Priority Financial Advisors LLCwww.clientpriority.com