Earn Rewards: Sign up now and earn a special reward after your first deposit. See offer details

Now available: New and improved Socially Responsible Investing portfolios. Learn more

<title>Dismiss</title>

Betterment

Save, invest, retire

GET — On the App Store

View
<title>Dismiss</title>
Loading

Our Favorite Flavor of Advice

Passive investing gets a shout-out from a prominent Wall Street global markets strategist.

Articles by Betterment Editors
By the Editorial Staff Betterment Resource Center Published May. 28, 2013
Published May. 28, 2013
2 min read

Morgan Stanley’s Head of Global Developed Markets, Gerard Minack, announced his retirement last week.  It was reported that Mr. Minack gave “amazing investment advice” right before he left Morgan.

  • Don’t try to pick stocks
  • Don’t try to time the market
  • Just invest in a portfolio of low-cost, tax-efficient index funds

 

Can I get a retweet?  These are some of the canons of Betterment’s investment philosophy since inception!  The bummer is that Mr. Minack was attacked by some as the story went out  (one commenter went as far as to call him “a failed analyst”); Here’s a breakdown of Mr. Minack’s supposedly outrageous arguments:

  1. On average, 60% of funds lag the market.
  2. Over longer periods, the percentage of funds that lag the market is much higher.
  3. Investors are terrible at market timing.  They put money into the market after stocks have done well for a long time, and they pull money out when stocks have collapsed.
  4. Because investors are lousy at market timing, their actual returns are far worse than the market returns or the average fund returns.  They sell before funds do well and buy before they do badly.
  5. Hedge funds aren’t the move either, because of the super high fees and recently lackluster performance.

We agree! Active investing is a negative sum game – someone has to lose for someone else to win.  The limited reward of active investing is not incentive enough to chance being the loser.

Think of it this way: If active managers add value, it’s at the expense of other active investors.  That’s because if a skilled active manager is overweight an undervalued stock, that means other active managers must be underweight it.  Before fees and expenses, trading is a zero sum game – ignoring these explicit costs, skilled investors’ returns are at the cost of other investors.  Now factor in fees and expenses – because like at the poker table, everyone must ante up.  If you’re paying a skilled investor, your returns are eaten into.  If you’re paying the cost of the “other” investor, that’s more of your money lost to active management.

And we cannot say enough about timing the market.  It’s simply a poor idea.

There’s a lot of noise around the “best way” to invest, and passive investing is nothing new.  Vanguard, Barclays Global Investors and State Street built their household names around it.  Morgan Stanley, however, is not a passive shop.  This is not like Jack Bogle left and told everyone to invest passively – it seems like Mr. Minack’s wisdom is objective and after years of global markets strategizing, simply what he thinks is best.

Are you on board with this investment philosophy?  Open a Betterment account or tell a friend about us.  We do all the things he recommends automatically so you don’t have to. We don’t time the market, we don’t pick stocks, and we do invest in a portfolio of low-cost, tax-efficient index funds.  We also provide customized asset allocations based on time horizon and other determining factors.  Our fees are amazing, too, because they won’t erode your returns.

Mr. Minack, have you checked out Betterment?

This article is part of
Original content by Betterment

Recommended Content

View article library

Goal-Based Investing: A Decade In Review

As we all look forward to and plan for the future, let’s stop and take a look at the past decade to see what we can learn from it.

Retirement | Personalized Advice for IRAs and 401(k) Plans

Get your retirement plan on track with Betterment’s digital planning and investing tools. You can sync your employer plans alongside your IRAs to get a better retirement picture. Then, get advice on how to save in a Tax Smart way.

Health Savings Accounts: The Sharpest Tax Tool In The Shed?

As an investor, you may be thinking about funding an HSA but are unsure about whether it is a useful financial planning tool. Here are six different scenarios for how an HSA can work for you.

How would you like to get started?

Manage spending with Checking

Checking with a Visa® debit card for your daily spending.

Save cash and earn interest

Grow your cash savings for general use for upcoming expenses.

Invest for a long-term goal

Build wealth or plan for your next big purchase.

Invest for retirement

Set up traditional, Roth, or SEP IRAs to save for the golden years.

See details and disclosure for Betterment's articles and FAQs.