DON’T BOTHER

Professionals can’t do it, so why do you think you can?

There are several reasons why investors might want to reconsider the notion that they canbeat the index, but chief amongthemis that eventhe experts can’t do it. It’s not that most professional money managers have fallen short of their respective benchmarks by just a little bit. A whopping 75% of funds focused on U.S. large-cap value and growth stocks trailed the S&P 500 through the first 10 months of 2014. Mid-cap funds fared even worse, with nearly 90% falling behind the Russell 2000 index. Unless you’re what Ben Grahamlabelled an “enterprising investor” — willing to devote time and care into securities that appear more attractive than average — trying to outguess the market is simply not worth the risk.

Even Warren Buffett, perhaps the best stock picker in history, has told the executors of his will to take a passive approach. He wants 10% of his more than US$60-billion estate in short-term government bonds and the remaining 90% in a low-cost S&P 500 index fund. Of course, picking great stocks should not be avoided completely. But when valuations, uncertainty and volatility are high, the job of an active investor is that much tougher. It doesn’t help that economic growth, monetary policy and stocks in various countries are on diverging trajectories.

Ramona Persaud, portfolio manager at Fidelity Investments, believes high macro uncertainty will probably lead to low dispersion and asset prices moving in tandem. “A lot of what might drive this macro uncertainty is quantitative easing by the Federal Reserve, ECB and Bank of Japan,” she said, pointing to the past few years as evidence.

The shift in the economic cycle from its middle stages to latter phases can also lead to indiscriminate selling, which occurred several times in 2014. Savvy investors can take advantage of quick changes in market momentum, while others often get caught up. “Picking stocks is really hard,” says Som Seif, chief executive of Purpose Investments Inc., noting that markets tend to have higher correlations when they are falling. “During tough times and good times, index-type products are generally going to be a better selection.”

One glimmer of hope: Seif says beating the index is much easier in Canada due to the equity market’s structural inefficiencies, whereas beating the S&P 500remains very difficult. —