Like Goliath, Index Funds Are Massive But They Also Have Weaknesses

Index Funds Are The Goliaths Of The Financial Advisory Industry (WealthManagement.com)

Using the David & Goliath fable, Bill Smead of Smead Capital writes that active management is like David, "because it has lost to the Index as a group over the last 13 years." "The Goliaths of the investing world are the indexes, which include companies like Vanguard, Blackrock and State Street, among others," writes Smead. But he points out that passive funds have weaknesses like Goliath too because they "can be slow to move."

"It's our observation that mergers, bankruptcies, and dismal stock performance are the only ways to get out of an index. It seems that every five to ten years the S&P 500 Index gets over-loaded with the most popular companies of the prior years. In 1999, it was tech and telecom stocks. Indexes, unlike the active managers were not nearly as nimble and could not adjust their portfolios quickly. In 2008, the overload was in energy, basic materials and heavy-industrial/international conglomerates"

He points out a few key reasons David or active managers, have been been beaten by the Goliaths. One key reason he cites is that "active managers are too active because of the pressure they feel to perform well every year, rather than relying on the ten-year numbers to justify their base of capital." And that to be successful stock pickers advisors need to "do what the index can't do and replicate what the index does well."

There Was A Sharp Jump In Risk Tolerance At The End Of 2013 (Investment News)

The end of 2013 saw a 40% increase in risk tolerance, according to the Acertus Market Sentiment Index, a monthly measurement of investor attitudes toward risk. This puts it in the 86th percentile relative to risk tolerance going back to 1986. Mitchell Eichen, CEO of Acertus Capital Management, said that investors are exhibiting "herd mentality" by pouring into stocks to chase gains. "This is indicative of investors' growing willingness to accept increased risk, a trend consistent with recent media reports of increasing risk tolerance," Eichen said.

Here Are The Best-Performing Investments Of The Millennium (Oppenheimer)

Oppenheimer has put out an "asset quilt" showing the returns of all major asset classes over the past thirteen years. Emerging market stocks, gold, and real estate investment trusts (REITs) were the best-performing investments, while, commodities, market-neutral hedge funds, and the S&P 500, were the worst. "For us, the total return quilt points to the quintessential importance of the age-old adage, 'Don't keep all your eggs in one basket', writes Oppenheimer's John Stoltzfus. "Diversification across asset classes is a key discipline not to be taken lightly or ignored by investors, particularly those who care for performance year to year."

There's A 'Dangerous Lack Of Bond Knowledge' Among Retirement Savers (FA Mag)

An investor survey from State Street Global Advisors has found that "retirement savers have a dangerous lack of bond knowledge," FA Mag's Ted Knutson reports. ""A lack of bond literacy could cause bigger problems now that participants say they have become more conservative," the firm said. "Participants may not understand the impact that greater conservatism can have on their portfolios' vulnerability to inflation and ability to generate the growth they need for retirement."

Deflation Could Trigger A Quick Stock Market Melt-Up, Followed By A Meltdown (Dr. Ed's Blog)

There has been some chatter about deflation lately. Eurozone core consumer prices are below 1% since October, and in the U.S. is at 1.7% through December in the U.S.. "Initially, deflation might actually be bullish for stocks, even causing a melt-up. That's because central bankers are already talking about the need to act decisively now to avoid it," writes Ed Yardeni. "Another round of ultra-easy monetary policies would surely cause stock prices to soar. If deflation prevails nonetheless, the melt-up would be followed by a meltdown, worsening the deflation."

"In general, falling consumer prices would be bad for corporate earnings. However, companies that are able to maintain some of their pricing power and earnings growth in a deflationary environment would certainly be highly valued."