Is your portfolio on Auto-Pilot?

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Is your portfolio on Auto-Pilot?

I read an industry article today on Indexing, stating “Indexing still has a lot of runway”.  I found that most of the article was bland, said very little and used quite a few statistics. Unfortunately there are some things that need to be looked at:

  1. The article is about ETF’s and led us to believe all ETFs are indexes. It didn’t actually say so, but the article certainly leads one to believe this is a fact. The facts are that very few follow an actual index. You can see their funds follow an index, many question where these indices came from. Most have come in to existence the same time as the ETF.

  2. The article leads one to believe that all mutual funds are not index followers (with the exception of outright index mutual funds). This could not be further from the truth. You can see in some of my past blogs that many are closet indexing mutual funds.

  3. The article is written by senior management of a prolific ETF generating corporation.

  4. The writer is making the point that active traders make the market and the indexers are simply along for the ride. He goes into a little fantasy of ‘what if’ there were no active traders, but this ends up going no-where. He is simply giving you the hope that these index funds will always trade tight to the market and have good upside potential.

  5. ZERO-SUM GAME – This writer goes on to state “Investing is a zero-sum game”. He could not have been more incorrect.

It is hard to believe that a senior person in a firm that exists solely because of markets would have no idea that the market grows. If you have never followed what a zero-sum game is, the best example I can think of is a cake. It will not get any larger, so when it gets cut up into pieces and the owner of the cake gives out 80% of the cake to others, the owner will have 20% left.

Investopedia explains it best as follows:

A situation in which one person’s gain is equivalent to another’s loss, so the net change in wealth or benefit is zero. A zero-sum game may have as few as two players, or millions of participants. Zero-sum games are found in game theory, but are less common than non-zero sum games. Poker and gambling are popular examples of zero-sum games since the sum of the amounts won by some players equals the combined losses of the others. So are games like chess and tennis, where there is one winner and one loser. In the financial markets, options and futures are examples of zero-sum games, excluding transaction costs. For every person who gains on a contract, there is a counter-party who loses. However, the stock market is not a zero-sum game. (emphasis/underline mine)

In a stock market there is growth. Simply look at a 20 year chart of the S&P 500 index below. There are always 500 stocks in this index and over 20 years it has gone from 450 to 2050. As you can see it has had good and bad times, but it has risen over time and is definitely not a zero-sum game.

You have to question the motives of the author and did they do their homework - or even understand the topic. The S&P 500 is a well-known index and yet you would not have increased your wealth with the growth from March 2000 until May of 2013. A well-managed active share mutual fund will beat this handily over time. Saving some money on fees while not making any money over 13 years just doesn’t make sense when there are active alternatives out there.

You don’t want Auto-pilot on the way down

Let me tell you, that when the market does go into a fall, you don’t want to be on ETF Index Auto-pilot. I want the pilot there and making the correct adjustments. I certainly don’t want my autopilot to not even understand that the market is not a zero-sum game. Both ways can end up in a crash.

If you want to see what a truly independent advisor can do for you, call me at 905-846-9060, ext.3838, email me at Terry.McIntyre@manulifesecurities.ca or visit my website at www.terrymcintyre.ca.