S&P Indices Versus Active (SPIVA) findings have evidenced this over the past 20 years. All this leads us to practical advice: forget about trying to outsmart everybody else. You’re no less better picking stocks on your own.
To add, ignoring your favourite financial chatterboxes on social media, run-of-the-mill pundits (such as yours truly) and other similar dull analysts could actually serve you well.
Low-cost index funds that mirror the overall market are the ideal solution but sadly don’t exist in this market.
To be fair, not all investment managers are oxymoronic. A few are great. But their potential is often stifled by a limiting environment and as a result, returns suffer. Whenever fund managers decide to buy something exciting, they may be held back by various written rules and regulations.
Some trustees are wedded to the top 10 NSE bigshots that offer a few pleasant surprises. They almost have to buy the Safaricoms, the KCBs, and the Equity Banks.
Others won’t allow investing in non-growth industries or in specific industry groups with heavy government presence or regulations.
If it’s not the mutual fund making up rules, then it’s the Capital Markets Authority (CMA). For instance, the CMA says a mutual fund cannot own more than 10 percent of its shares in offshore investments nor can they invest more than 80 percent of the fund’s assets in listed securities.
Nonetheless, even in the most idyllic scenarios, most fund managers are simply mediocre. Researchers in the latest SPIVA report show that while declining markets should make active management skills more valuable, only a minority of active managers were able to outperform in several categories.
This lack of consistency in beating their respective benchmarks is a testament that trying to time markets is a foolhardy endeavour. It echoes a frequent theme of SPIVA Scorecards that timing markets in the near term effectively lowers an investor's long-term expected returns.
What do we do then? Do we discard our fund investments? No, they are a wonderful invention for people who have neither the time nor the inclination to test their wits against the stock market, as well as for people with small amounts of money to invest who seek diversification.
That said, this critique is to increase your market awareness. You now know better than to listen to boasts about peer-beating short-term results. Plus, knowing that you’re competing against oxymorons whenever you buy or sell shares is quite empowering — more than two-thirds of NSE is controlled by local institutions, a good number being pension, insurance and mutual funds.
More importantly, this is a call for index funds. Of course, they are not perfect, but they are a viable escape from the folly of active management.
