80 Billion Dollars!

That is the number sloshing around the interweb this week. It was first brought up by Larry Swedroe and it represents the cost to investors of actively managed portfolios that lag benchmark indexes. Apparently "studies have indicated that the vast majority of active managers fail to capture alpha on a regular basis."

These debates come up all the time and it is pretty clear that the data can be mined to say whatever someone wants it to say. Generating alpha against some equity benchmark is not the goal for many very wealthy people. I mean really wealthy. There are also plenty of people who have below normal tolerances for volatility.

I do not know what percentage of the investing population that might have been studied is either too wealthy or too scared but these are real segments of the sample size.

I do know that these debates are far too generalized and thus cloud the issue. I said many times before that for some people passive is the way to go but for others active works very well. Further, the $80 billion number is for one year. Hussman has said (and I agree) that it makes more sense to consider this over the entire stock market cycle.


What about risk adjusted returns? In years past I have hypothetically asked readers to weigh in with their thoughts about a strategy that captured 80% of the upside with only half the downside (this is in the same neighborhood of what John Serrapere tries to do) and based on those past posts it was very well received. Well obviously anyone pursuing something along these lines is not trying to capture alpha on an annual basis.

On December 31, 1999 the S&P 500 closed at 1469. At 1033 going into the open Thursday it is down 30% (not including dividends) for the decade. I would venture to say that if you are meaningfully ahead of the SPX' result for the decade that is far more important than whether you added alpha in 2004, 2005, 2006 or 2007.

People believe what they believe and should do what is right for them but many of the debates on this subject are far too simplistic.

Comments

[Gardener]

Thanks Roger. As with most retail advice such as Swedroe peddles the talk is all too simplistic but it is also a one shoe fits all approach. 60/40, buy and hold, etc do not take into account our individual needs. I have no interest in matching or beating an equity index and I'm not sure why there is this American obsession with equities in general. I do feel as though this canned advice that so many of these book writers publish does not serve most of their readers.

2009 Sep 10 12:58 PM