IFA
Index Porfolio 90
IFA
Index Porfolio 70
IFA
Index Porfolio 50
IFA
Index Porfolio 30
IFA
Index Porfolio 10
Step 1 - Active Investors
Recognize
an active investor
Summary: Active investors hope to pick winners among the many stocks, times, managers, and investment styles. But these investors forget that markets are moved by news which is unpredictable and random. Therefore, the movements of stocks, markets, managers, and styles are unpredictable and random. Markets are also efficient, meaning that news is rapidly reflected in market prices. As a result, active investing is not a viable or profitable strategy. The only reliable source of long-term returns is from consistent exposure to economic risk factors backed by more than 81 years of historical data.
Numerous studies have shown that
actively managed investments generally carry more risk and lower returns
than globally diversified, risk-calibrated index portfolios. Despite
this fact, governing boards of institutions frequently fall prey to
manager-picking consultants and the allure of past winners, hiring
the hottest new fund managers only to fire them later because their
past performance doesn’t persist in the subsequent periods. A
recent study conducted by Amit Goyal of Emory University and Sunil
Wahal of Arizona State University found that manager hiring and firing
decisions made by consultants and board members was a complete waste
of money and the board members’ precious time. |
“The Selection and Termination
of Investment Management Firms by Plan Sponsors” reveals the
negative impact of manager chasing. The results, as set forth in the
figure below, demonstrate that during the ten-year period from 1994
through 2003, consultants and boards which based their fund manager
hiring decisions on consistent above benchmark past performance were
largely disappointed with subsequent index-like results. They often
then fired their managers in favor of another recent top performer,
repeating the cycle again. This cyclical motion undermines their investment
policy statements and the opportunity of achieving optimal returns,
the kind of returns that are available by simply buying, holding and
rebalancing a passively managed portfolio of index funds that keeps
costs low and controls risk. |
Additional Charts and Graph from Step 1
 Active vs. Passive |
 Watching the Grass Grow |
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