How Clear Is That Crystal Ball?

Keeping with the theme of last week’s article on markets and those people who attempt to forecast them, I thought it might be fun to ask a few more questions out loud. Rather than give you boring statistics or a bunch of charts to explain stock and bond market research, I’d like to invite you to sit back and ponder some of the same questions I’ve spent time thinking about during those few, yet vital, quiet moments I have.

If you’ll recall, I shared a few questions last week that have guided my research of stock pickers and market forecasters. One of those questions was: “How good are individuals and institutions at predicting the markets, really?” Of course, the answer is: It depends.

I want to go a bit deeper in sharing my thoughts on this question, but before I elaborate, we need to ask another, more fundamental question. Why does this question even matter? …I’m glad you asked.

Investors, like you, have a choice with their money. Investors can invest in funds that are actively managed, by a team of people, or they can invest passively, by owning funds that track large parts of the market. This ‘passive’ type of investment is called an index fund and may track thousands of companies rather than placing bets on comparatively few. Therefore, the answer to our original question may impact whether you choose to trust a stock-picker (active manager) or instead trust the market as a whole (passive index).

The logic goes like this: a money manager who can predict the market with consistency, and wins most of those bets, should be worth paying a premium for that ability. On the other hand, if active managers do not outperform the market, then investors should choose to place their bets directly on the market itself by investing their money in index funds that track the whole market.

Here’s what I found in my research. There are seasons when active managers, as a group, bested the stock market. When? Active managers tended to do their best work when markets experienced significant shifts. Notably, during the very early 1990’s and the early 2000’s.

On the other hand, active managers have underperformed the market for many lengthy stretches of time when markets were fairly “normal.” And when this occurred, the difference in performance was quite steep.

But here’s the catch…during the seasons when active managers did well, it wasn’t all active managers that did well. As a group they did well, but not all managers can win and not all managers can win consistently. So, if you’re investing with an active manager you’d better pick the right season for active management AND you’d better pick the right managers. Oh yeah…you’ll need to keep doing this year after year, since the best-performing managers change regularly.

So what does all of this mean?

Simply put, paying managers to place bets may be worth it if they’re consistently winning those bets by a margin large enough to earn their fee and net you the extra.

Fourth Dimension offers clients either option: active money managers and indexing strategies. While the decision is more nuanced than I can explore fully in this discussion, the conversation is one you should consider having with us very soon. By knowing your choices, you can avoid regret, and move confidently in your planning.

More soon…keep an eye out for next week’s email. And don’t forget to look below for more information about our upcoming Discovery Sessions.

Adam Cufr, RICP®

Discovery Sessions

You may have heard that we’re beginning to offer something called Discovery Sessions. What is a Discovery Session? Well, I’m glad you asked. It is a free 60-minute experience designed to help people learn the tools, strategies, and methods necessary for building a detailed blueprint to allow them to balance both financial and lifestyle goals alike.

Designed for people new to Fourth Dimension, attending one of these no-obligation sessions gives them the opportunity to learn, for themselves, what they want their retirement to look like and the options to consider when designing their plan. It’s a really thought-provoking process and we would love it if you were to introduce the session to friends who may be considering their retirement options.

Please click here to view a detailed flyer that you can share with a friend.

Upcoming Sessions:
Tuesday, April 9th at 5:30 P.M.
Thursday, April 21st at 5:30 P.M.