There is a better and more prudent way to invest.
In a recent interview with CNBC, CEO of Franklin Templeton Jenny Johnson made the following comment related to the market, “It’s no question, it’s a difficult time. And I would say the good news is, in times of great volatility, active management pays off.”
We can only assume that she means that in times of market volatility, active management delivers superior returns when compared to a structured, efficient market approach.
George Orwell once said that myths which are believed in tend to become true. Obviously, Orwell never met an active manager or professional fund managers. The persistent myth that active fund managers consistently beat the market is on par with the easter bunny-something that is nice to believe in since it brings you good things but is totally make believe.
SPIVA and active managers skill
SPIVA is a research firm that has developed a ‘scorecard’ that compares actively managed funds against their relevant benchmarks. They not only look at US data but other global markets as well. Their findings are staggering. SPIVA researchers write:
“Should investment results be attributed to skill or luck? Genuine skill is likely to persist, while luck is random and fleeting. Thus, one measure of skill is the consistency of a fund’s performance relative to its peers or to its benchmark. The Persistence Scorecard shows that regardless of asset class or style focus, active management outperformance is typically short-lived, with few funds consistently outranking their peers or benchmarks.”
What are the claims of active managers?
Active managers believe the market is inefficient and that they can beat the market through their skill, providing consistent returns. Since assets are mispriced due to this inefficiency, smart investors who find these opportunities will be able take advantage of them.
On the flip side, the efficient market hypothesis (EMH) is a concept in financial economics that states that stock markets accurately reflect all available information. The EMH was first formally stated in the 1960s by Eugene Fama, and it has since become one of the most influential ideas in finance.
According to the EMH, all available information about a company is already reflected in its stock price. Thus, if the stock price of Company A is higher than that of Company B, it must be because Company A has better prospects than Company B and investors have already taken this into account. In other words, if you think you can “beat the market,” you’re almost certainly wrong—and if you think you can beat the market consistently over time, well…you’re probably even more wrong than most people are!
In the Efficient Market Hypothesis, the company’s stock price reflects all available information, so there’s no point trying to time your investments or beat the market by buying when stocks are cheap and selling when they’re expensive (or vice versa).
Diversification is the way – Use EMH to build a winning investment strategy
Investors should rely on a sensible and academic approach to investing. Utilizing the Efficient Market Hypothesis, an investor can deploy their investment capital in a way that maximizes returns while minimizing risk. This approach is called diversification, and it is the best way to ensure your investment portfolio will perform well over time. By owning “the market” an investor does not have to rely on a “guessing” strategy when it comes to capturing market returns. By owning all the available stocks in a broad market portfolio (made up of various asset classes across the world), the investor increases their probability of success.
Failing to invest in the capital markets in this manner may result in lost opportunities for investors. Investors who do not diversify their portfolios are at a disadvantage to those who do. This is especially true if one focuses solely on domestic stocks, or only invests in certain asset classes such as real estate or commodities. The truth is that the financial markets are global and interconnected, and investors can benefit from this interdependency by investing globally.
Active management and missed opportunities (Lost Decade)
To prove the point of global diversification and its benefits, researchers at DFA looked at period known to investors as the “Lost Decade.”
We can examine the potential opportunity cost associated with failing to diversify globally by reflecting on the period in global markets from 2000–2009. During this period, often called the “lost decade” by US investors, the S&P 500 Index recorded one of its worst 10-year performances with a total cumulative return of –9.1%.
However, looking beyond US large cap equities, conditions were more favorable for global equity investors, as most equity asset classes outside the US generated positive returns over the course of the decade.
Expanding beyond this period and looking at performance for each of the 11 decades starting in 1900 and ending in 2010, the US market outperformed the world market in five decades and underperformed in the other six. This further reinforces why an investor pursuing the equity premium should consider a global allocation. By holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.
The danger of having a US biased investment approach
There is an inherent bias among investors regarding diversification. The idea of investing outside the US is perceived as risky. This bias is often referred to as “Home Bias.” This home bias “[…] refers to the tendency of equity investors to favor investing in domestic stocks over investing in the stocks of foreign companies. The overwhelming majority of investors exhibit a high degree of home bias, which can be seen in the high percentage of domestic stocks that comprise their equity portfolio.”
A “home bias” has holes in it and can limit the investment return opportunities available for investors. Consider that the US Market is the biggest in the world but there are close to 18,500 companies trading outside the US. This number represents close to 40% of the world’s equity market. Not to mention that a majority of US businesses source materials and even earn revenue globally.
The point is simple. Embrace EMH and diversify globally.
Instead of making futile guesses about what is likely to happen in the future, use the power of the free market–the collective knowledge of millions who buy and sell securities every day—letting them set prices for us.
At Ballentine Capital Advisors we focus on what we do best—interpreting research, designing portfolios, creating financial plans, and servicing clients. This gives us the freedom to let markets do what they do best: drive information into prices. This academic approach to investing and coupling it with prudent financial planning, is a winning strategy and offers the highest probability of investment success. This makes the investment process easier for you to understand and follow during all market conditions.
Let us know if you have questions on how your financial plan embraces EMH and portfolio diversification.
Have a great weekend!
Source: Ballentine Capital Advisors
Golf Tip of the Week
Four things To Know Before Going To A Group Golf Clinic
The only person who should be helping you with your swing is a certified golf instructor, no matter how helpful your playing partners might think they are. Generally, there are two types of lessons: one-on-one and group lessons. Taking a lesson with a group of people is a different experience than having the total attention of an instructor. Group lessons tend to run on the mutual, excited energy of everyone there. You’ll meet new people, with different issues in their golf games. You can pick up unexpected tips as you listen to an instructor pinpoint an opportunity for improvement in another player, and you can make new friends, too.
Here are four things you need to know before going to a group lesson.
Be honest about your game
Come armed with your own knowledge on course management, shot making, short game and physical dysfunctions. If you have a clear understanding of what you know, it will help the lead instructor provide a more personalized experience. With different people and instructors present, there will be different explanations. So, your golf IQ should go up.
Don’t be nervous
Emotionally know that everyone who takes time out of their day to join a golf school format wants to improve, have fun in the process, and are equally nervous or anxious as you are.
If you’re not used to working on your game all day, pace yourself. If you’re feeling fatigued, let your instructor know. You’ll get more out of the day by managing your energy than trying to do too much.
Bring a notebook. At the end of each station, take notes that resonate with you in order to remember the keys for your own success.
Tip adapted from golfdigest.comi
Recipe of the Week
- 650g butternut pumpkin, peeled, deseeded
- 100g butter, softened
- 1 1/2 cups brown sugar
- 2 eggs
- 2 cups self-rising flour
- 1/2 tsp baking soda
- 1 tsp ground cinnamon
- 1/2 tsp nutmeg
- 1/2 tsp ground ginger
- 1/4 tsp ground cloves
- Preheat oven to 350°F. Grease base and sides of a 6cm deep, 10.5cm x 20.5cm (base) loaf pan. Line with baking paper, allowing a 2cm overhang at both long ends.
- Wash and cut pumpkin into 4cm pieces. With water clinging, place pumpkin in a single layer on a microwave-safe plate. Cover with plastic wrap. Microwave on high for 3 to 4 minutes or until pumpkin is tender. Set aside to cool. Drain and place cooled pumpkin in a food processor. Process until smooth (you should have 1 cup).
- Using an electric mixer, mix butter and sugar until pale and fluffy. Add eggs and beat until well combined. Stir in pumpkin.
- Sift flour, baking soda, cinnamon, nutmeg, ginger, and cloves over pumpkin mixture. Stir gently to combine. Spoon into prepared pan. Smooth surface. Bake for 50 to 55 minutes or until a skewer inserted into the center comes out clean. Stand in pan for 10 minutes. Lift onto a wire rack. Serve warm or cold.
Recipe adapted from taste.com.auii
Health Tip of the Week
7 School Lunch Tips For Picky Eaters
Are you packing a school lunch for a picky eater? Getting children to eat healthfully is a struggle for many parents. In this article, Johns Hopkins pediatric dietitian Meredith Thivierge offers school lunch tips for picky eaters to help you prepare meals with the vitamins, minerals and nutrients your child needs to grow and succeed in school.
Make Lunch Fun
Children, especially younger children, can be influenced by how the food looks. Fun shapes and bright colors may grab their attention and encourage them to take a bite. You don’t have to spend a lot of time carving cartoon characters out of bologna. Just take a few minutes to arrange the lunch neatly, add a personal note or use a cookie cutter to shape a sandwich or slice of cheese to add visual interest to the meal. “If the food looks fun and appetizing to you, there is a good chance your picky eater will also find it appetizing,” Thivierge says.
Sneak in Foods to Cover All Food Groups
You may have to get creative to make sure your picky eater’s lunch covers the five major food groups: fruits, vegetables, protein, grains and dairy. If your child is allergic to or intolerant of specific foods, it may be worth talking to your pediatrician about a multivitamin or supplement. If dietary restrictions are not an issue, you can try sneaking in foods your picky eater refuses to eat. “Blending cauliflower with mashed potatoes or adding spinach to a fruit smoothie are a few ways parents can trick their children into eating healthy foods,” Thivierge suggests. She also advises asking your child why they dislike certain foods. If they simply don’t like the texture or look, this can sometimes be remedied by trying different cooking techniques.
Involve Your Children
Picky eaters, and children in general, are more likely to eat something if they helped to make it. Participation gives kids a sense of ownership in the final product and helps them see exactly what’s inside that sandwich or salad they are having for lunch. You can involve your children at every stage of the process, from picking a recipe to food shopping and meal preparation. “Together you could create a list of foods your children enjoy and that you approve of and then have them choose from this list,” recommends Thivierge. This allows parents to remain in control while giving a child the freedom of choice.
Avoid Introducing New Foods at Lunch
It’s important to keep introducing new foods to your picky eater, as it can take 10 to 20 times of trying a food before a child may start liking it. However, school lunch may not be the best time for it. Children tend to get distracted during lunch and often don’t have enough time to finish everything they have in their lunch box. They may start with more familiar foods and are more likely to ignore new items. Thivierge suggests introducing new foods at dinner when the whole family can encourage the child to try something new.
Make a List and Change Up the Menu
Start working on your school lunch menu based on the foods your child agrees to eat. “It helps to make a list of all foods your picky eater tolerates, but it’s also important to find different ways to serve them,” Thivierge says. For example, if cucumber is the only vegetable your picky eater will stomach, try serving it with different dips or roll it up with lunch meats and cheese. The United States Department of Agriculture website has a variety of recipes created with input from school children to help you find new school lunch ideas. Changing it up is the key to keeping your child from losing interest in the few healthy foods they like.
Think Outside the Lunch Box
What do you picture when you think about a typical school lunch? Is it a ham and cheese sandwich, a carton of milk and an apple? Although there is nothing wrong with sandwiches, they can get boring quickly. Why limit yourself to traditional lunch foods? It’s perfectly fine to pack soups, salads, quesadillas and even breakfast foods for lunch. You could come up with theme days like “mac ’n cheese Mondays” so that your child knows what to expect. “And if your child wants to eat lunch at school, that’s okay too. Find a balance between school lunches and packed lunches and plan these meals together,” Thivierge says.
Be a Role Model
Children tend to mirror their parents. If you don’t eat lunch and instead snack all day, your child may start skipping lunch too. Or if you enjoy a cupcake before dinner, your picky eater may start filling up on dessert before they get to the healthy part of the school lunch. “Leading with a good example is important, especially when it comes to foods you as a parent may be picky about,” points out Thivierge. If you serve mushrooms to your child, yet pick them off of your own plate, your child may follow your cues.
Tip adapted from hopkinsmedicine.orgiii
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