Author Reveals Active Management Folly
IFA’s Dan Solin blew a gaping hole through the myth that active
managers add value to an investor’s portfolio.
In a September 8, 2009 CNBC debate between Solin, IFA Senior Vice President
and best-selling investment book author (Solin’s "The
Smartest Retirement Book You'll Ever Read" was just released)
and Doug Kreps, principal and managing director at Fort Pitt Capital
Group an active manager, Solin revealed important data about the ongoing
benefits of diversification — even in the face of the global market
downturn suffered in 2008.
"Even though portfolios were decimated, diversification worked
fine," said Solin. "Bonds didn't lose any money, and if you
had a globally diversified portfolio of stocks, you probably lost less
money than you would have lost if you didn't. It doesn't protect you
from overall market declines, but it works better than the alternative."
Kreps concurred with Solin’s regard for the value of diversification,
but asserted that an active manager could effectively guide an investor
through diversification and add value.
Armed with data from a comprehensive study that covered a 32-year time
period and the results of more than 2,100 active managers, Solin refuted
Kreps’s argument and cited the results of “False
Discoveries in Mutual Fund Performance,” the bombshell discovery
which shows that 99.4% of the active fund managers were shown to lack
any genuine stock-picking ability.
Referencing the recent Dalbar
study of investor behavior, Solin revealed that an investor in
a globally diversified, passively managed index portfolio would have
earned at least 400% higher returns than the average investor who relies
on speculation and performance chasing behaviors.
"What Wall Street does is package luck and sell it as skill. The
real data shows that passive management, actually in the last 20 years
has achieved a greater return than active management."
Solin’s summation of the importance of global diversification
and the pertinent data that reveals the parasitic nature of active managers
dovetails IFA President and founder Mark Hebner’s message from
last week which set forth IFA’s
Position Statement on Investing.
Diversification works. You can achieve diversification by buying, holding
and rebalancing a low-cost portfolio of index funds that represent multiple
asset classes from around the globe. You can maximize your peace of mind
and your returns by investing in an asset allocation that is risk-appropriate
for you and carries as strong of a small and value tilt as your risk
here to find out now which Index Portfolio is right for you.
Report: Does Diversification Work in Financial Crises?
here to read the full paper
IFA’s Academic Consultant and Nobel Prize Winner, Harry Markowitz,
Mark Hebner and Mary Brunson detail the role of diversification during
recent and historic downturns.