Stop Reacting, This Is a Numbers Game

Steve McDonald By Steve McDonald, Bond Strategist, The Oxford Club

Slap In The Face Award


Here’s a slap for everyone out there who bought into the idea that passive investing – investing in index funds and ETFs – will return more than actively managed mutual funds.

And it has nothing to do with the ETFs or the funds. This one is all about the little guy’s emotion-driven panic-selling.

DALBAR, a Boston-based behavioral finance research group, recently dropped a bombshell on the money business…

Its new report stated that over the long term – 15 years – actively managed funds beat passive investments by a large margin, 4.04% versus 2.85%.

That’s 119 basis points, and in the managed money business, that’s a big, big number!

The reason for this giant spread is that actively managed funds employ the time-tested strategies that we know make money: asset allocation and preservation strategies.

Both resulted in better retention during down periods. The owners didn’t panic-sell as often into sell-offs and corrections.

Passive funds returned more during up periods, but actively managed funds preserved more during down periods.

And it’s the down periods that make the difference.

The fact that active funds are less transparent helped as well. You can’t see what’s happening as easily in an actively managed fund as compared to an index ETF whose numbers are plastered all over the TV all day, every day.

(Note: Both actively managed funds and passive investments underperform the S&P 500, which had an annualized return of 5.76% over the past 15 years. To take the emotion out of investing and beat the broader market – not just the returns of passive investments – click here now.)

The less the small investor knows, the less he can get involved and screw up the works.

DALBAR has been collecting data about small investor behavior for more than 30 years. Its 2016 report stated that despite all the education efforts to curb the small investor’s emotion-driven panic-selling, nothing has made a difference.

In fact, the small investor’s emotion-driven selling is getting worse, not better; their long-term returns are dropping annually.

I wish I could say that this new data will finally drive home the point that emotions have no place in investing – but it won’t. The crazy selling at the bottom will continue, I’m sure.

This is a game about numbers and discipline, not listening to your gut. If you can’t get your emotions out of the equation, you need the help of someone who can.

Sorry for the bad news.

Good investing,


P.S. My colleague Marc Lichtenfeld recently launched a service that’s a huge win for the little guy. His service, Tactical Trader Alert, takes the emotion out of investing by using a system that makes buy recommendations only when a stock hits nine “profit triggers.” Perhaps DALBAR would see better results if it encouraged investors to use a system like Marc’s instead of promoting only education! To learn more about how Marc is using his proprietary, military-grade system to overcome the plight of the average investor, click here now.