Beating the crowd in surprising markets

If you accept that markets are hard to predict, you can start to focus on what you can control to improve your investing results.

In the first three months of 2020, share markets around the world plunged by 35% or more, at a speed not seen since the crash of 1987.

Then from late March markets recovered, fast. From the low point, Australian shares are up by 40% and other markets like the German DAX by over 50%. The tech heavy NASDAQ just made a new all-time high above 10,000.

Nearly nobody predicted the extent of the fall, even fewer the speed of the recovery.

Bizarrely, and despite the unpredictability of 2020 so far, fund managers are still lining up to share their opinion on where markets are headed next… the same fund managers whose market-timing and stock picking strategies have consistently underperformed the share index over 1, 3, 5 and 10 years.

The world is surprising

Markets haven’t suddenly become harder to predict in 2020. They’re always hard to predict, it just becomes more obvious when lots of smart people get it very wrong at the same time.  

In the words of Nobel Prize winner Daniel Kahneman, author of Thinking Fast & Slow:

What you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.

Daniel Kahneman

The same is true of long term investing success.

It doesn’t come from predicting market surprises. It comes from accepting that markets are surprising and having an investment strategy that reflects this.

How have active fund managers performed through this crisis?

In the lead up to 2020, active fund managers regularly reminded us that they would be better at protecting against losses when markets are volatile. Their 10-year underperformance compared with indexing, they explained, was due to rising share markets which have supported index ETFs.

Then came 2020.

March was the most volatile month on record for shares. Nine trading days in March showed volatility of above 10% for the S&P/ASX200, even more than the entire GFC. March should have presented the perfect opportunity for active fund managers to profit from their supposed superior investing skills, right?

Not quite.

As it turned out, only 39% of Australian share fund managers were able to beat a benchmark index in the first quarter of 2020, according to S&P. It was even worse for fixed income managers with only 12% ahead of the index. 1

% of funds outperformed by benchmark

Fund category 2019 Q1 2020
Australian Equity General 61 61
Australian Bonds 72 88

Investors have lost faith in the active fund management industry’s ability to look after their wealth – and rightly so. Active fund managers have consistently underperformed indexing in both up and down markets, showing that investing versus the index is indeed zero sum.

The myth that active fund managers do better in volatile markets has well and truly been debunked in 2020. 

It’s never really a stock pickers market

Warren Buffett continues to champion index funds to anyone prepared to listen.

At the 2020 Berkshire Hathaway Annual Shareholders Meeting he stated:

“Well I can tell you I haven’t changed my will and it directs that my widow would have 90% of the funds in index funds,” Buffett said. “I think it’s better advice than people are generally getting from people that are paid a lot to give advice.”

He continues to caution investors to understand that many advisers and fund managers are more focused on sales then being fiduciaries.

“You’re dealing with an industry where it pays to be a great salesperson,” Buffett said. “There’s a lot more money in selling than in actually managing, if you look into the essence of investment management.” 

“One side has high fees and they think they can pick out stocks and the other side has low fees,” Buffett said. “I know which side is going to win over time.”

Why we told clients to stay invested in index ETFs

In March we admitted to having no idea what was going to happen next, in markets, in the economy and in the epidemiology of COVID-19. 

We also told clients that nobody ever knows what’s going to happen next. Markets are surprising. That’s why we made the case not to move to cash or change investment strategies. To stick to the plan and do nothing. To continue investing in index funds and let us automatically rebalance when needed. 

Our advice on Coronavirus

Rather than react to the latest news headlines around the Coronavirus, stay focussed on what’s within your control and proven to build long term wealth. Stick to your investing plan, stay diversified and let Stockspot automatically rebalance whenever needed to keep your portfolio in line with your goals. 

What does Coronavirus mean for your portfolio, published 12 March 2020

Boring is brilliant

Investing over the long term means not worrying about market movements over the short term. Research consistently shows that buying and holding a broad mix of diversified investments for the long term and rebalancing occasionally will put you in a better position than trying to time your entries and exits.

Coronavirus won’t change this.

In late March while many advisers and active fund managers were making dire predictions and moving into cash, we were rebalancing thousands of clients out of some defensive assets into shares to keep their portfolio risk in line with their objectives.

Now markets are up 40%, we’ve been rebalancing the other way by selling some Australian shares to lock in some profits to keep portfolios balanced.

Not only have the Stockspot strategies continued to have positive 12 month returns though this period, but they’ve landed in the top 1% of similar funds over 1, 3, and 5 years.

We achieved this exceptional performance for clients by following a proven process rather than trying to make predictions.

Focus on what’s within your control

If you accept that markets are hard to predict, you can start to focus on what you can control to improve your investing results. Your portfolio risk, diversification, costs and your own investing behaviour. Rather than relying on forecasts, you can automate your investing and rebalancing to take advantage of whatever markets throw at you, without emotion or bias.

On the other hand, if 2020 hasn’t convinced you that markets are hard to predict, nothing will. 

[1] Q1 2020 Australia SPIVA results

Founder and CEO

Chris has been vocal in calling out the industry 'Fat Cats' and is known for telling it as it is. He sits on two Advisory Committees for the industry regulator ASIC, and was previously a fund manager at UBS. He holds a Bachelor of Commerce (Accounting/Finance Co-op Scholarship) from UNSW.

Grow your wealth effortlessly

Get your free personalised portfolio recommendation

Get started
Join thousands of Australian already investing with Stockspot