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

<title>Dismiss</title>

Betterment

Save, invest, retire

GET — On the App Store

View

Concerned about market volatility? We've got answers and guidance for you. See videos

<title>Dismiss</title>

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?

Recommended Content

View All Resources

6 Ways to Retain Top Talent with Financial Wellness

Beyond just handing over a paycheck, supporting your employees’ financial wellness plays a crucial part in retaining top talent.

High-Yield Savings Accounts: The Ultimate Guide

High-yield savings accounts can offer higher interest rates than traditional counterparts. Learn everything you need to know about them in this guide.

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.

Explore your first goal

Cash Reserve

Our high-yield account built to help you earn more on every dollar you save.

Safety Net

This is a great place to start—an emergency fund for life's unplanned hiccups. A safety net is a conservative portfolio.

Retirement

Whether it's a long way off or just around the corner, we'll help you save for the retirement you deserve.

General Investing

If you want to invest and build wealth over time, then this is the goal for you. This is an excellent goal type for unknown future needs or money you plan to pass to future generations.

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