I came across these two awesome charts that needed to be shared. Over the last year or so a tremendous amount of money has gone into passive investing and rightfully so. At the same time, it’s pretty amazing how many have given up on trying to beat the market. Like Kevin Durant; if you can’t beat’em, join them.
This chart has gone parabolic.
But investors are a fickle bunch, easy comes, easy goes. In other words, those who threw in the towel without having any conviction behind their move will be the first ones to bail on the first setback.
A great many either don’t know, turned a blind eye, or have yet to accept the fact that everything goes through ebb and flow. Good times, bad times, hot and cold, peaks and valleys, etc.
I get the feeling that many who jumped on the passive bandwagon forgot that the market while it mostly goes up, it also goes down. It won’t always be sunshine and rainbows.
The chart below shows you the ebb and flow of funds outperforming the SP500. A very astute observation was made by @Babak; “notice the lows seem to correspond to market tops, early 1970′s, 1987, 1999.”
Before you lose your wig, I am not implying that we are going to top, what I’m pointing out is that this all a natural process. This is the way things work, good times are followed by subpar times, and it is always darkest before dawn. You should not be surprised when we have the inevitable retracement.
Top performing managers from 2000-2010, the top quartile who ended with the best record 97% of them spent at least 3 of those 10 years in the bottom half of performance. 79% spent at least 3 years at the bottom quartile of performance, 47% of those who ended up with the best record spent at least 3 of the 10 years at the bottom decile of performance.
To reiterate something that I have said before; many managers (hedge funds, endowments) need the market to have down years in able to outperform. A lot of the outperformance from funds comes from avoiding down years, I wrote about it here (WHY HEDGE FUNDS NEED DOWN YEARS).
source; Cheap Beta
Frank Zorrilla, Registered Advisor In New York. If you need a second opinion, suggestions, and or feedback in regards to the market feel free to reach me at fzorrilla@zorcapital.com or 646-480-7463.
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