Vanguard’s research team examined exactly this question in a July 2014 study, “Quantifying the Impact of Chasing Fund Performance.”

Vanguard notes that chasing performance isn’t limited to individuals. Most institutional investors do so as well. Unfortunately, studies on pension plan sponsors have found that the managers who were fired actually go on to outperform their replacements. Yet, despite this and other evidence demonstrating the lack of persistence in outperformance beyond the randomly expected, chasing prior returns must have a strong allure because investors keep doing it.

Read the rest of the article on CBS News.

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It’s a pretty safe bet that the results in each new scorecard — officially called the S&P Indices Versus Active Fund report, or SPIVA — will be extremely similar to the findings of the reports that came before it. The recently released midyear 2014 SPIVA scorecard is no exception.

It again provides a thorough look at why the past is, in fact, prologue — at least when it comes to the overall results of active managers relative to their appropriate benchmarks.

Read the rest of the article on CBS News.

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The most recent issue of AQR Capital Management’s quarterly newsletter for clients provides great insight into both the bad behaviors investors tend to engage in, as well as positive practices that can be used to address and correct bad habits and biases — leading to improved long-term investment performance.

We’ll first look at the bad behaviors.

Read the rest of the article on CBS News.

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On its way to 2,000, the S&P 500 had to endure two major bear markets. It fell from its high of 1,576.74 on Oct. 11, 2007, all the way to its low of 666.79 on March 6, 2009. That means the index has risen more than 1,330 points from its bottom five years ago.

From March 2009 through July 2014, the S&P 500 returned just over 22 percent per year, providing a total return of 195 percent — quite an impressive performance for the period. This year alone, it has defied many so-called experts and risen from 1,848 to 2,000, a price-only gain of more than 8 percent.

Read the rest of the article on CBS News.

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Before looking specifically at Mobius’ record, it’s important to note that an argument often made by advocates of active management is that while indexing, or passive investing is the winning strategy in “efficient” markets — such as the large-cap stocks of developed countries — active management is the winning strategy in “inefficient markets.” And emerging markets are often considered the poster child for inefficient markets.

Returning to Mobius, let’s establish his credentials. He is executive chairman of the Templeton Emerging Markets Group and holds a doctoral degree from MIT. He has been involved in emerging markets for more than 40 years and has received numerous industry awards, including Bloomberg Markets Magazine’s “50 Most Influential People” in 2011, “Emerging Markets Equity Manager of the Year 2001” by International Money Marketing, and “Ten Top Money Managers of the 20th Century” in a 1999 Carson Group survey. He is clearly both an intelligent and extremely accomplished individual.

Read the rest of the article on CBS News.

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“Market Sense and Nonsense”

While not a book for novice investors, Jack Schwager’s “Market Sense and Nonsense: How the Markets Really Work (and How They Don’t)” is still an accessible read for investors interested in learning the truth behind the way many people think the markets work.

Schwager, who breaks his book into 21 short chapters, provides an education on many important facts and myths about the investment management business. He does so in a concise and entertaining way. The sections on measuring risk, understanding correlation (an often misunderstood topic) and how the use of leverage affects risk and return are particularly good.

Read the rest of the article on CBS News.

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They show, year after year, that fewer active managers of U.S. domestic equity funds demonstrate persistent outperformance than would be randomly expected. The only conclusion to draw from this data is that past performance is not a reliable predictor of future performance.

Standard & Poor’s has expanded the scope of its reports, as well as the scope of the active-versus-passive management debate, with the launch of its European scorecard. The just-released inaugural report examines year-end results for 2013, in addition to the prior three- and five-year periods. Here are some of the report’s key findings about European equity funds:

Read the rest of the article on CBS News.

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Among the reasons investors around the world exhibit this bias is that they confuse the familiar with the safe. Unfortunately, Lake Wobegon — home of the perennially above-average — exists only in fiction. It cannot be that every developed country is safer than the others.

Compounding the problem is that investors tend to believe not only that their home country is a safer place to invest, but also that their home country will produce higher returns. This belief defies the basic financial concept that risk and expected return are related.

Read the rest of the article on CBS News.

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It’s certainly true that the population is aging. In 1980, the ratio of workers to retirees was 5.2:1, and by 2025 it’s projected to be just 2.9:1. But that doesn’t necessarily mean the stock market will take a big hit.

To help you understand why, we’ll begin by pointing out that only unexpected events have an impact on stock prices. And if anything can be forecasted, it’s demographic data. You can be certain that investors in general are well aware of this trend, and thus have incorporated that knowledge and the expected effect of retirees’ equity sales into current prices.

Read the rest of the article at CBS Money Watch.

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Keep in mind that if these 10 predictions were really sure things, all — or at least most — of them should have happened. But as the research indicates, past isn’t prologue, and no one is a good forecaster when it comes to performance. As is our practice, we give a score of +1 for a forecast that came true, a -1 for a prediction that turned out to be wrong, and a 0 for one that’s basically a toss-up.

Our first sure thing is that, with the Fed announcing its plan to end quantitative easing, interest rates will rise. Thus, investors should and would limit bond holdings to the shortest maturities. Vanguard’s Short-Term Bond Index Fund (VBISX) returned 0.93 percent, but its Intermediate-Term Bond Index Fund (VBIIX) returned 4.92 percent and its Long-Term Bond Index Fund (VBLTX) returned 12.04 percent. Score: -1

The second sure thing follows from the first. With the Fed finally tapering, and the predicted following rise in interest rates, emerging market equities would perform poorly. Vanguard’s Emerging Markets Index Fund (VEIEX) returned 6.94 percent, underperforming the 7.05 percent return of Vanguard’s 500 Index Fund (VFINX) by just 0.11 percentage points.

It’s worth noting that the difference in returns between the emerging markets index and domestic large-cap index compared here narrowed to those 0.11 percentage points at the end of the second quarter from 2.2 percentage points at the end of the first quarter, when the VEIEX posted returns of -0.4 percent. While returns from the VEIEX have yet to fully catch returns from the domestic stock index in this example, they’re already closing in, and it’s only halfway through the year. Foreign and domestic equities are performing closely enough at this point time for us to call this forecast untrue. Score: -1

The third sure thing is that with the cyclically adjusted price-earnings ratio (CAPE) at 26.17 as we entered 2014, about 60 percent above its long-term average, stocks should be avoided. But as mentioned, VFINX returned 7.05 percent as of June 30, far outpacing its own first-quarter return of 1.76 percent and again outperforming cash and safe short-term bonds. Vanguard’s Small Cap Index Fund (NAESX) returned a healthy 6.38 percent, while Vanguard’s Large Value Index Fund (VIVAX), which returned 7.16 percent, and Vanguard’s Small Cap Value Fund (VISVX), which returned 8.29 percent, finished the quarter by turning in even stronger performances. Score: -1

The fourth sure thing is that, with continuing fiscal and monetary stimulus being injected into the economy, we should see a sharp rise in inflation. In the last Consumer Price Index (CPI) report, released in June, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in May on a seasonally adjusted basis. The first four months showed increases of just 0.1 percent, 0.1 percent, 0.2 percent, and 0.3 percent, respectively. While inflation has picked up a bit, we haven’t seen the sharp rise that was predicted. However, given the recent uptick, we’ll be generous. Until there’s more information, I’ll call this one a draw. Score: 0

The fifth sure thing follows from the fourth. It’s that rising inflation should lead to a falling dollar. The dollar index closed 2013 at 80.29. It finished the first quarter at a virtually unchanged 80.28, and it closed the second quarter at a close 79.83. In addition, June 30 was the first time the index’s low dipped under 80 since May 21, where it has been hovering all year. Score: -1

The sixth sure thing follows from the fourth and fifth. It’s that gold should reverse the sharp fall it has experienced recently. Gold closed 2013 at $1,204.50. It ended the second quarter at $1,322.30. Score: +1

The seventh sure thing is that the municipal bond market should be hit both by interest rate increases and default problems, keeping investors away. We’ve seen neither rate increases nor default problems. Vanguard’s Short-Term Tax Exempt Fund (VWSTX) returned 0.49 percent, its Intermediate-Term Tax Exempt Fund (VWITX) returned 4.68 percent and its Long-Term Tax Exempt Fund (VWLTX) returned 7.16 percent. Score: -1

The eighth sure thing is that economic recovery will continue down its tepid path. The Philadelphia Federal Reserve’s Survey of Professional Forecasters predicted GDP growth of 2.6 percent in 2014. However, revised first-quarter GDP figures released in June came in at -2.9 percent. That’s the worst first quarter for GDP since 2009. The plunge in the first-quarter data should also reverse, to some degree, a positive reading of GDP in the second quarter. Score: +1

The ninth sure thing is that, after defying the gurus in 2013, market volatility will rise. The VIX ended 2013 at 13.72. While it closed the first quarter slightly higher, at 13.88, it decreased significantly to close the second quarter at 11.57 after falling steadily for most of May and June. Score: -1

Our tenth and final sure thing is that active management will beat passive management in net returns. Despite an overwhelming amount of research to the contrary, 75 percent of advisors believed this to be true, according to an InvestmentNews report from January 2014. Technically, we’ll have to wait for the annual SPIVA report to give a score on this one. We know, however, that there’s really no such thing as a stock-picker’s year.

Our total second-quarter score came in at -4, compared with a total first-quarter score of -3. Both scores exclude our 10th “sure thing,” which we’ll collect data on at year-end.

So far, it’s pretty apparent that even the sure things haven’t turned out so sure at all. Keep this in mind the next time you’re tempted to give credence to some guru’s forecast, and instead plan for the long-term.

Copyright © 2014, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.

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