Morningstar recently performed a series of back-tested experiments on ultra-passive investing using the S&P 500 as a starting point.
The goal was to assess investment returns with a total of ZERO transactions after the initial set-up over a 30 year period. Even dividends were not invested, but simply remained in cash where they would earn an assumed rate of return of 0%.
The zero turn portfolio exceeded the return of the index over a full 30 year period. The timeframes were reviewed over three 10 year durations. Over the first decade of duration, the “do-nothing” portfolio outperformed the S&P 500 and in the second and third timeframe, the portfolio matched the S&P 500.
Such investment results, to the absolute chagrin of both active managers and ETF investors alike, are sobering, as they completely upend conventional investment theory as well as invalidating much of the marketing used to shape retail and institutional investment decisions.
The documented ability of a completely buy-hold-forget account to match or exceed the return of the S&P 500, over a 30 year duration, with no benefit of dividend reinvestment, zero interest earned on cash balances and a turn ratio of zero, even when a company goes bankrupt or is removed from the index during periodic reconstitution, represents an absolute gob-smacking conundrum for the professional investment industry at large.
Exchange traded funds market their wares on the basis that they can “almost” match index returns (they attempt to mimic index returns less annual transaction fees typically expressed in the range of 7 to 10 basis points), but do so with absolutely furious transaction flow, leading to increased taxation for non sheltered accounts. The ETF industries’ dirty secret is that most of the money generated for the sponsoring investment firm comes from order flows and minute spreads. If an investor can beat the returns of any ETF over time, via the complete elimination of orders over the life of the account, then an ETF truly serves no purpose.
As to active managers, the lack of portfolio rebalancing (“you must sell out a percentage of your portfolio periodically to comply with our in-house compliance department edicts when an investment goes up“) also, largely, makes their job moot. I cannot tell you enough about push-back that I periodically run into, from all manner of the investment industry who believe, without supporting evidence, who counsel to transact and who are both trained (group-think) and brow-beaten from the CFA Institute to monitor portfolios for portfolio concentration with a view towards “rebalancing”, to the point that in most active funds, compliance, peer pressure or moral suasion supplant and override legitimate outperformance. Bring up the notion of letting winners run at any investment symposium and you can almost see the pitchforks come out, with signs already pre-made declaring: “burn the heretics“.
I encourage readers to take a VERY long pause to thoroughly ponder the article’s conclusions.
In particular, review the section titled “Investment lessons: part one”. I have commented, for decades, often in the face of vociferous investor objections, on conclusions #2, #3 and #4 of the findings. It would seem, based upon the results, that there is definitely something to the notion of “less-is-more“, “don’t worry about rebalancing” and “DO NOT go with your gut”.
And don’t just gloss over the findings, remark to yourself, “that’s interesting“, only then to get back to the daily frenetic goal of finding the next big thing in the investment world. An article of this nature, published by Morningstar (a firm that exists primarily to promotes both active funds and ETFs), which destroys decades of conventional investment doctrine in a no-nonsense fashion and in one fell swoop, is less heretical, potentially more evolutionary.