Is Your Investment Strategy Mediocre?

“Successful investing can almost be easy: Avoid harmful “accidents” and do what will achieve your own most important long-term objectives. The very human irony is that learning this lesson can take so many years that by the time we “get it,” it may be too late to use the lesson because the powers of compounding need time.” – Charles Ellis


The New York Times ran an article last weekend about Robert Olstein, a mutual fund manager who isn’t exactly a huge fan of index funds. Here’s what he had to say:

To the contrary, he says the rise of index funds is part of a trend toward sloppy investing — a willingness to follow the herd, to rely on momentum in a rising market.

“It’s like saying mediocrity is O.K. — that it’s more than O.K., it’s the best that anyone should hope for,” Mr. Olstein says. “It’s saying a guy like me can’t beat the market — that he shouldn’t even bother trying. That’s wrong! It really ticks me off. I can beat the market. I have beaten the market.”

While Olstein’s funds have managed to beat the market, we all know that the majority of active mutual funds have a difficult time doing this on a consistent basis over the long term. And it’s impossible to know in advance which funds will outperform in the future.

According to the SPIVA Scorecard report, as of June 30, over 70% of all US domestic equity funds underperformed their index benchmarks over both 3 and 5 year periods. The numbers are similarly terrible for global, international, emerging markets and bond funds as the high costs of active management compound throughout the years against investors.

It’s funny that being a mediocre investor, as Olstein puts it, actually means that your results are above average more often than not.

But this is not a post extolling the virtues of either kind of investment strategy.

It doesn’t always have to be an ‘us-versus-them’ mentality.

Everything seems to be taken to the extremes these days. Stocks are either extremely overvalued or they’re extremely undervalued. It’s a bubble or a crash. You must be either far right or far left in your political leanings. It’s either east cost or west coast in the rap battle (sorry, that’s my 90s nostalgia).

There doesn’t have to be a war for your investing soul where you should be forced to choose between active or passive management.

Terms like ‘best ever’ and ‘greatest of all-time’ are thrown out on a weekly basis, only to be replaced the following week when something else interesting happens.

This line of thinking spills over into the finance arena as well.

My investment approach is the best.

No, mine is the sure way to riches.

The only ones that try to make you think this way are the financial salespeople. It’s their job to try to convince you that there is only one route to investment success.

These are the people that tell you that there is one silver bullet, best way to invest, and oh by the way, it just so happens that it’s the one that they’re selling.

No approach work perfectly. Each year there will be a new strategy that will work until it doesn’t. As James Montier of GMO reminded investors recently:

“No asset (or strategy) is so good that it can be purchased irrespective of the price paid.”

There’s no need to become all puffed up if your style is in vogue. The markets do a nice job of humbling those that become too overconfident.

Beating the market is nice if you can do it, but it shouldn’t be very high on the list of goals for your investment plan.

The best you can do is to create a comprehensive investment plan that focuses on the long term. Keep your costs and trading activity low. Diversify globally. Keep your risk profile and time horizon in mind when making big decisions. And do your best to keep your behavioral biases under control by automating good decisions.

Then, unless something in your life drastically changes, stick with your long term plan with periodic updates along the way.

Sticking to your plan, no matter what strategy you choose to implement, is the most important factor for any successful investment approach.

Investing is not a multiple choice question on a test. There’s no right or wrong answer. Different strategies can help investors with varying circumstances achieve their financial and life goals. And that is the main reason we invest in the first place.

It’s not so we can be proven to be right or wrong about our investment calls. Who cares what strategy you use as long as you get to where you need to be in the end?

Sources:
Beating the market, as a reachable goal (NY Times)
SPIVA U.S. Mid Year 2013

Further Reading:
What’s my best investment option?

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  1. Martin commented on Dec 10

    It is amazing seeing people trying to beat the market, failing and then seeing talking heads telling you “I told you so”.

    I agree that if you have at least a bit sound plan and strategy, over the long run you will beat the market or at least be in line with the benchmark.

    My dividend growth portfolio is young in terms of 20+ year investing horizon and yet I am starting to see nice results I wasn’t able to reach ever before.

    Nice post.

    • Ben commented on Dec 11

      I know, pride comes before the fall. No reason that guy’s fund will outperform in the future. And it’s hard to distinguish luck from skill. Best to stay humble.

      • Martin commented on Dec 12

        Totally agree. But time will always show whether it was a skill or just a pure luck.