Broker Check

Old Wives' Tales and Investing

June 16, 2023

Do you ever wonder where old wives' tales come from? I have four young daughters, ages 10 to 3. As my wife and I began our family, I remembered being told multiple times throughout my life that I would not need to wait for an ultrasound to know the gender of my unborn children. If the fetal heart rate is above 140, it's a girl; below 140, it's a boy. Well, I'm here to report that those indicators are worthless. After my first daughter's fetal heart rate was 170, my second daughter checked in at a cool 120. The other two were somewhere in between. So how do these tales persist? Perhaps they started with some measure of consistency or coincidence, but now it seems they survive by being repeated enough to penetrate our subconscious and live there rent-free. 

Unfortunately, there are some old wives' tales in investing. These tales are simple. They sound good, and there is usually some evidence supporting them. Whether helpful or hurtful tales, they exist for the same reason all tales do – constant repetition to the point where no one asks questions. 

The most commonplace tale is that "the average active manager can't beat its benchmark." Now, context is required to interpret what that means. First, it's not untrue, but it is potentially misleading. Second, it takes root in the distrust against the industry stemming from 2008-2009. I discuss that more in my article on Bernie Madoff.

Usually, the statement is made, "75%, or 80% of active fund managers cannot beat their benchmark." That is understood by most to mean, "Don't waste your time with portfolio managers and financial advisors. Just buy and hold the index; the professionals can't pick winners or losers anyway." The obvious question that is never asked is "Wait, so 20-25% of managers DO beat their benchmark?" To quote Lloyd Christmas "So you're telling me there's a chance??"

Even if 99% of managers couldn't beat their benchmark, wouldn't that suggest that 1% do? Shouldn't we ask how? How often? By how much? The average golfer doesn't break 100… does that mean no one can? Every weekend you can turn on the TV and see evidence of people who break par, let alone 100.

Moreover, these arguments are usually only over US stocks. If you consider other asset classes, active managers have even stronger arguments. The grandest irony of all is that Vanguard, the biggest beneficiary of this tale, doesn't even believe it, at least according to their offerings and literature. They offer active funds and have a long-standing white paper in the industry that claims the value of working with an advisor is around 3% annually. 

Old wives' tales may or may not have measures of truth in them. Some tales are more harmless than others. When it comes to investing and your future, try to have a discerning eye around the tales you hear, especially ones that go unchallenged. 

The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.