The news wasn’t good for money managers last month. Not that they paid any attention. New research indicated that professional money managers would provide superior results by doing absolutely nothing.
As you will soon see, there is no hyperbole here.
This is sad for managers. It leaves them in an uncomfortable position. They can only hope that high compensation with no heavy lifting offsets the futility of their work.
The story here is simple. New research shows that making no investment changes whatsoever is vastly superior to what money managers do – make decisions that result in investment changes.
I’m serious about that “whatsoever” part.
Decisions reduce investment returns
Basically, the more decisions the professional managers make, the worse their results are likely to be.
Indeed, the best investment results come from total sloth. Doing nothing. Nada. Being in a coma will improve your investment results, but a good, solid case of catatonia may suffice. Investment paralysis isn’t to be lamented. It deserves celebration.
Hard to believe, I know. We like to believe in action. Decisive action. It’s the American Way. All our heroes are action heroes. There are not now, and never have been, any heroes of inaction. Action heroes are far superior to indecisive, uncertain muddle-bugs like you and me.
Well, it ain’t so.
We have potential. All we have to do is become deliberate and disciplined about our inaction.
More passive than passive
In mid-April, Wall Street Journal columnist Jason Zweig laid out research by three finance professors – Hendrik Bessembinder at Arizona State, Michael Cooper at the University of Utah and Feng Zhang at Southern Methodist University. They found, as the SPIVA studies I’ve cited many times have regularly found, that the longer the investment period, the lower the percentage of managed funds that beat a broad stock index fund such as an S&P 500 fund or a total stock market fund.
They estimated that investors missed an additional $1 trillion in wealth by going with stock pickers over broad index funds.
More is less
They also found that as money managers focused their decisions on a small number of stocks, betting more on the quality of their decisions, the greater the odds their performance would trail a broad index fund. So much for brave bets and big commitments.
A few days later Morningstar researcher Jeffrey Ptak wrote about his work testing the limits of inaction. Rather than own an index fund that changed over time, he asked how a portfolio that bought every stock in the S&P 500 would do if no replacements were made and stocks that were acquired for cash were not replaced but held as cash.
Think of it as the Rip Van Winkle portfolio. You buy the stocks, go to sleep and wake up 10 years later. Voila! Solid sleep. Superior performance.
In the 10-year period ending March 31, 2023, he found that the do-nothing portfolio was about equal to the S&P 500 index portfolio but less risky due to the accumulated cash holdings. He found similar results for 10-year portfolios ending March 31, 2013 and March 31, 2003.
Over the full 30-year period the do-nothing portfolio provided a slightly higher return at less risk.
Better than ALL managed funds
Shortly after that, Morningstar columnist John Rekenthaler wrote a follow-up piece showing just how rare that level of performance was. Of the 772 managed funds that started the 30-year period, only 360 survived and, of those, only 85 had a higher return than do-nothing. But of those 85, only eight had lower risk. ZERO funds had both a higher return and lower risk.
Action-oriented readers are probably asking whether any of the major fund firms have created their version of a do-nothing, investor coma, Rip Van Winkle fund. But, sadly, they haven’t.
But don’t worry. The news is out. The day is young. Wall Street is action oriented. My bet is that we’ll see the first coma ETF by the end of summer. Perhaps we’ll see a series of them, going well beyond the obvious Rip Van Winkle and Snow White.
How much will Wall Street charge for doing nothing?
My crystal ball is unclear about only one thing. How much of a premium will they charge for leaving our money alone?
It’s a tough decision.
Related columns:
Scott Burns, “The importance of being a dull investor,” 9/29/1991 https://scottburns.com/on-the-importance-of-being-a-dull-investor/
“The Portfolio of Nobel Prize Winners,” from 1999, retells behavioral economist Richard Thaler introducing a group of journalists to discovering how Nobel laureate Harry Markowitz invested his money — an even split between an index of stocks and an index of bonds. (The basic Couch Potato portfolio.)
Scott Burns, “The Couch Potato Hits the Big Time: New York,” 5/11/1999 https://scottburns.com/the-couch-potato-hits-the-big-time-new-york/
Scott Burns, “How to build the basic Couch Potato Portfolio anywhere, for next to nothing,” 9/12/2018 https://scottburns.com/how-to-build-the-basic-couch-potato-portfolio-anywhere-for-next-to-nothing/
Scott Burns, “The Simplicity Manifesto,” 3/31/2019 https://scottburns.com/the-simplicity-manifesto/
Scott Burns, “The High cost of Low Returns and Yields,” 7/24/2015 https://scottburns.com/the-high-cost-of-low-returns-and-yields/
Scott Burns, “The Longevity of the Couch Potato Portfolio,”2/9/2019 https://scottburns.com/the-longevity-of-the-couch-potato-portfolio/
Couch Potato Investing Annual Reports
Scott Burns, “The Pudding Report, 2022,” 1/15/2023 https://scottburns.com/the-pudding-report-2022/ (1 year)
Scott Burns, “The Pudding Report, 2021: How Much Is That In Dollars,” 2/13/2022 https://scottburns.com/the-pudding-report-2022/ (2 years ago)
Scott Burns, “The Pudding Report, 2020,” 1/30/2021 https://scottburns.com/the-pudding-report-2020-the-proof-is-in-the-pudding/ (3 years ago)
Scott Burns, “Let’s Hear It for Sloth and Simplicity!,” 1/18/2019, https://scottburns.com/lets-hear-it-for-sloth-and-simplicity/ (5 years ago)
Scott Burns, “A Modest Year, But Way Better Than Hedge Funds,” 2/2/2014 https://scottburns.com/a-modest-year-but-way-better-than-hedge-funds/
(10 years ago)
Scott Burns, “Sloth Triumps Again!,” 2/15/2009 https://scottburns.com/sloth-triumphs-again/ (15 years ago)
Scott Burns, “The Couch Potato Portfolio Smoothes Your Ride,” 1/20/2004 https://scottburns.com/sloth-triumphs-again/ (20 years ago)
Hard Data from the SPIVA reports:
Scott Burns, “SPIVA: The investment news that’s no longer news,” 6/19/2022 https://scottburns.com/index-funds-beat-managed-funds-again-and-again/
Scott Burns, “Two days of truth in 365 days of snake oil,” 4/17/2020 https://scottburns.com/two-days-of-truth-in-365-days-of-snake-oil/
Scott Burns, “SPIVA, Again and Again and Again,” 11/29/2019 https://scottburns.com/index-funds-beat-managed-funds-again-and-again/
Scott Burns, “Four milestones for successful investing, “ 12/9/2006 https://scottburns.com/four-milestones-for-successful-investing/
Sources and References:
Hendrik Bessembind, Michael J. Cooper, Feng Zhang, “Mutual fund performance at long horizons,” 1/2023, Journal of Financial Economics, https://www.sciencedirect.com/science/article/abs/pii/S0304405X22002264
Jason Zweig, “Want to Beat the Stock Market? Avoid the Cost of ‘Being Human’, Wall Street Journal, 4/14/2023 https://www.wsj.com/articles/active-vs-passive-index-fund-beat-the-stock-market-58e8bd83
Jeffrey Ptak, “What Beat the S&P 500 Over the Past Three Decades? Doing Nothing,” 4/17/2023 https://www.morningstar.com/articles/1150002/what-beat-the-sp-500-over-the-past-three-decades-doing-nothing
John Rekenthaler, “More Lessons from the Do Nothing Portfolio,” 4/20/2023 https://www.morningstar.com/articles/1150913/more-lessons-from-the-do-nothing-portfolio
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
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(c) Scott Burns, 2023