The Stock Market is a Distraction

The Stock Market is a Distraction

“The stock market is a giant distraction from the business of investing.” – Jack Bogle

Last week Barry Ritholtz conducted a great interview with Jack Bogle on Bloomberg’s Masters in Business radio show/podcast.  Bogle is founder and retired CEO of The Vanguard Group and would likely find himself on the Mount Rushmore of investors.  For finance nerds like myself, he’s a legend.

Bogle famously created the first true index fund.  An index fund is an investment product that tracks the performance of the overall market by holding all the underlying components of an index.  The index most familiar to casual investors is probably the S&P 500, a collection of the 500 biggest public companies in the U.S..


Bogle believed that instead of paying high fees to managers who attempt to “beat the market”, most investors would be better off investing in low-cost index funds that mimic the performance of the market.  Is he right though?  Yup.

Every year Standard & Poor’s publishes the SPIVA Scorecard (Standard & Poor’s Indices Versus Active), a report that analyzes the performance of active fund managers vs their passive index benchmarks.  How’d active managers do in 2015?  As usual, not good.

  • In 2015, 66.11% of large-cap managers, 56.81% of mid-cap managers, and 72.2% of small-cap managers underperformed the S&P 500, the S&P MidCap 400®, and the S&P SmallCap 600®, respectively.
  •  The figures are equally unfavorable when viewed over longer-term investment horizons. Over the five-year period, 84.15% of large-cap managers, 76.69% of mid-cap managers, and 90.13% of small-cap managers lagged their respective benchmarks.
  •  Similarly, over the 10-year investment horizon, 82.14% of large-cap managers, 87.61% of mid-cap managers, and 88.42% of small-cap managers failed to outperform on a relative basis.

2015 Year-End SPIVA® U.S. Scorecard

Pretty amazing…or terrible, depending on how you look at it.

As investors, here are two basic assumptions we can make:

  1. Over long periods of time, financial markets pay people for holding risk assets.
  2. Active management within financial markets is a zero-sum game.  For every winner, there is a loser.

With regards to the second assumption, if you group all the passive investors together and all active investors together, in aggregate, they both hold “the market.”  Their aggregate returns are what the market gives them, MINUS their fees.  Because fees for active management are higher, the passive investors (as a group) end up on top.  The math is pretty simple.

“Index funds have a big problem…all the money goes to the investors.” – Bogle

To be clear, I’m not suggesting that the only good investment strategy is passive indexing.  I do think its core features provides a great framework, though.  Smart investing begins with understanding your goals.  Most of us aren’t speculators.  The goal isn’t to “beat the market,” it is to grow our savings so we can live comfortably later in life.

Investing for your future isn’t about what you can make in the market, it’s about what you can take from it.  Keep your costs low, avoid the temptation to speculate and take your fair share of returns from the market.  It doesn’t get any simpler than that!

Further Reading…

Three Simple Rules for Investors

Tim Brennan

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