Market behavior can rattle even the most seasoned investor’s nerves. In the U.S., we’re coming up on a decade of strong markets and economic growth.
But remember, change is always coming. The economy will always have downturns. But that doesn’t mean your portfolio will take a major hit. And if it does? There are ways to weather the storm that will help you rebuild for long-term success.
The SPIVA Index
The SPIVA index, which stands for the S&P Indices Versus Active, is a great indicator of the health of actively-managed investments. The SPIVA index measures actively-managed funds against passive ones to see how they are performing.
The SPIVA index is useful because it shows that the majority of the time, actively-held investments do not outperform the market. It can be tempting to try to time the market, but as history and statistics have shown us, long-term, passive investments like index funds and EFTs perform better over time.
Check out the SPIVA index report here to see how different investments have performed over time.
For example, U.S. large-cap indexes outperformed mutual funds by 87% over the past 15 years. 15-year real estate indexes outperformed mutual funds by 83%, and large-cap growth indexes for the same period of time outperformed mutual funds by 91%.
Managing Emotions in Investing
When the market hits a rough patch, our initial reaction is to get out of it. It’s a natural response to that fear. But if you look at what works over time, it’s better to ride the waves than give in to knee-jerk reactions.
Riding the ups and downs of the waves produces better results over time. Some people I speak to say they were able to get out before the last market downturn. It’s great to be able to avoid negative effects on your portfolio, but it also often means you miss out on the potentially significant upswing that follows.
The SPIVA index is evidence of this. It shows that some actively-held investments do outperform the market over time, but only a very small percentage (around 17% for 2018.)
So what does that mean for investors? There are three important points I want you to think about:
- There is a ton of data out there about the markets. Computer models and artificial intelligence are now analyzing the markets as well, so it’s more difficult for managers to capitalize on the success or failure of the markets.
- It’s hard to let go when you had high hopes for a stock. Many managers hold onto stocks longer than they should because they don’t want to be wrong about that investment.
- Active mutual funds cost more than indexes and EFTs. You might only pay 1 percent, but if you’re looking at a 7 percent rate of return, then 15 percent of your yield is eaten up in fees.
You can also check out my video on active investing for more of my thoughts about active vs. passive investing:
Do you need help getting a handle on your investments? Contact me today to set up an initial meeting.