Market volatility and negative news can cause some investors to reflect on their current approach. Money managers and product companies continue to bring new choices to market to win your dollars. One of increasing interest is passive investing. What happened in the last two quarters, what is passive management vs active management, and what should we remember?
The last two quarters were note worthily volatile. Two things are generally behind market movement. Central Bank comments or some sort of shock. In the crash of 2008, both of these were responsible.
For the most part positive Central Bank comments generally compel investment, negative comments cause pullback and nervous investor response. Active money managers know this and attempt to take advantage of it. Most often Central Banks strive to be somewhere in between positive and negative which helps to avoid severe market events like December 2018 and quick recoveries like the first quarter. Recent events confirm they do not always get it right. Why do Central Banks have so much influence? Central Banks choose to raise or lower interest rates to speed up or slow down the economy. Interest rates impact what companies and consumers have to pay to service existing debt or to consider using more to expand or buy goods. These actions are a delicate balance. Oil movement and currency are part of the story too.
The impact on investors means coping with your balances rising and falling. In other words, volatility. It’s worth noting that you still have the same number of units regardless of market fluctuations. They are only worth more or less if you sold that particular day. This is why advisors ensure your time line to invest is a key consideration of the investment solution recommended. The vast majority of volatility can be controlled by asset allocation where we reflect the investor’s risk tolerance.
Another topic of late is the growth in passive investing which, in its simplest form, is achieved by purchasing a fund that tracks an index. Passive investing has risen in popularity largely due to the reputation of low fees. Another common quote by supporters is that 80% of active managers under-perform their benchmark. Seems like compelling arguments so let’s unpack this a little more.
Passive investors believe there are no anomalies in the market and that all details that could influence markets are known and have already been factored into pricing. In other words markets are efficient and therefore you cannot profit by having a money manager. Those in the active management camp do not believe markets are efficient and believe investor reaction to volatility is part of the reason. Active managers examine each company’s financials and management along with the particular stocks’ opportunity to grow in its sector. It’s in this arena that knowing the manager’s philosophy is related to the risk you are taking in buying that fund.
The studies referenced that show 80% of active managers under-perform their benchmark are largely USA market focused. It can be argued that the US market is large and more mature making it harder to beat benchmarks and find anomalies. This key consideration is simply not true of all economies. Many money managers use a combination of both passive and active management strategies to drive fees lower.
Most investors are best served to identify their goals and what they want to achieve with their money, identify any road blocks to success, and then drill down to what investment products to use to get there. Growth, fees and current times are part of the criteria but are not the whole story. How are the managers driving growth, does the product meet your risk tolerance, and how large is the fund? Is it truly diversified? What risk is being taken with your money? What is the year to year performance and the consistency like? Mathematically you’ll end up with more dollars in your jeans without wide fluctuations year to year. What about values? Does it matter what impact companies have on our world and humanity that your money is supporting? Our goal is to help you look at your full picture and goals so you can make the right choice for you.
If you invest for purpose rather than single objectives like fees or avoiding taxation you are more likely to be content with the products chosen, the risks, and fees involved to get to your future. For most investors having a plan, considering all these details, and implementing the plan will help you get to where you want to go. Want to talk more about it? Already on a plan? Many appreciate a free second opinion to make sure you are on track. We are happy to help.
Carol Haayema, CFP®, CKA®
Senior Financial Advisor
Christian Credit Union
Credential Asset Management Inc.
Mutual funds are offered through Credential Asset Management Inc. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This report is provided as a general source of information and should not be considered personal advice. Please speak to your personal financial representative before making any financial planning decision or implementing any strategy.