Our Favorite Flavor of Advice

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?