The Gift That Keeps on Giving

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The S&P 500 index has delivered a wonderful gift to investors this year. Through November, it’s up almost 28%, and since 2009, it’s grown at an annual rate 50% higher than its historical average. US and international large and small value stocks have also had a very good year and have either matched or exceeded their historical average since 2009.

Performance goes a long way in explaining why index funds and indexed exchange-traded funds (ETFs) now account for 36% of fund assets compared to 18% in 2008.* Active managers were expected by naive investors to offer downside protection during severe market declines. They didn’t during the 2000-2002 decline, and they failed again in 2007-2008.

So, another myth of active management has been shattered. But is active management really in its death throes, as some people suggest?

Personally, I’m not convinced. Only 13% of the total value of US stocks at year-end 2018 were indexed.* But I remain hopeful. For this trend to continue, investors should look beyond the performance of the S&P 500 index in order to realize the full value of a “passive” strategy.

If they do, they may find the kind of indexing Equius practices—asset class investing—is like how the character in the movie Love Story described love: it means never having to say you’re sorry.

Our Love Story

We didn’t need to apologize to our clients from 1995 to 1999, when small-cap and value stocks under-performed large growth stocks, and we haven’t beaten our chests as these stocks have significantly outperformed since and for the full period. We set the right expectations from the start, and we saw them through. Market timing (or asset class timing, in this case) doesn’t work. Patience does.

We didn’t need to apologize to our clients when the Dimensional small-cap and value index funds underperformed the Vanguard value stock index fund from 1995 to1999, and we haven’t beaten our chests as the Dimensional funds have outperformed since and for the full period. We set the right expectations from the start, and we saw them through. Market timing (or fund timing, in this case) doesn’t work. Patience does.

We didn’t need to apologize to our clients for staying fully invested in stocks during the 2007-2008 market decline while diligently rebalancing as promised, and we haven’t beaten our chests as stocks have exploded upward since. We set the right expectations from the start, and we saw them through. Market timing doesn’t work. Patience does.

We’re not sorry for the fact that international stocks have significantly underperformed US stocks over the past few years, and we’re not beating our chests as those asset classes appear to be turning around this year. We set the right expectations from the start, and we’ve seen them through. Market timing (or country timing, in this case) doesn’t work. Patience does.

And finally, we’re not apologizing for avoiding commodities, hedge funds, venture capital, and other “alternative” investments that haven’t paid off for retail investors through the years. We set the right expectations from the start, and we’ve seen them through. Kitchen sink investing (throwing in everything that smells like an asset class) helps advisors in their marketing efforts but dumbs down returns for investors. Patience with the core asset classes is a far better course over time.

The evidence, theory, and logic continue to support global indexing and the return premiums of small cap and value stocks. Therefore, we intend to continue to show the kind of love for our clients that means never having to say we’re sorry.

Happy Holidays!

The Equius Team hopes you enjoy the love and joy of the holiday season, and we look forward to serving you next year and for many years to come.


*The 2019 Investment Company Institute (ICI) Fact Book

Equius Partners is a Registered Investment Advisor. Please consider the investment objectives, risks, and charges and expenses of any mutual fund and read the prospectus carefully before investing. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Past performance is not a guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate the risk of market loss.

© 2020 Equius Partners, Inc.

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