Most managed portfolios have failed to match or exceed market returns. Of the few portfolios that outperform market indexes in any given year, even fewer can repeat the feat of outperformance over three or five year periods†. Based on these statistics one could conclude that investing in market indexes is the only reliable way to place the odds of success in one’s favour.
Yet investing in market indexes has its own limitations. The most damaging feature of index funds is their extreme volatility. Consider the following statistics††: for the calendar year 2008, the Canadian large cap index TSX returned –33.0%, while the USA large cap growth index S&P500 returned –21.9% after losing another 10.6% in the previous year. The developed world market index MSCI EAFE (excludes North America) returned –29.4% after losing another 5.3% in the previous year. (All rates of returns are in Canadian dollar terms.) How realistic is it to expect our clients, who have just seen their portfolio decline from $800,000 to $560,000 over a two-year period, to remain emotionally detached and remain invested? Even though history proves that staying invested is the right course of action. For most mere mortals this is next to impossible.
At arpadWEALTH we recognize the shortfalls of both approaches. We acknowledge that the two most important determinants of your investment success are:
Fear and greed are in all of us; it is our two basic instincts that served our ancestors so well. Unfortunately in the area of investing, both are destructive emotions. We reduce this fear and greed response to market movements by utilizing portfolios that have decreased volatility, and we further reduce your emotional response to market events by way of investor education. This is part of our value proposition to you.
A consistently effective way to capture your fair share of wealth creation is to deploy your capital throughout the public equity and debt markets in a broadly diversified manner. We achieve that by utilizing the Three-Factor Model, an investment management theory developed by finance academics Eugene Fama Sr. and Kenneth French in the late 1990s.
† The case for index-fund investing for Canadian investors by Vanguard Research.
†† Source of statistics as of Feb 1, 2015 can be found here.