The Performance Gap
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- Опубликовано: 8 май 2024
- Everybody wants to outperform the market, but most investors underperform for a simple reason resulting in a sizable gap between investor returns and investment returns.
I am going to tell you what it is and how you can do better.
References: zbib.org/649f0e979c704fa18096...
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The best advice I got about portfolio management: your portfolio is like a bar of soap. The more you handle it, the smaller it gets.
Chris Pedersen who works with Paul Merriman says that all the time
@@grigorirasputin425 I actually saw it on WallStreetBets a couple years ago I think. Didn't know the source of it till now.
i love that quote,,so true
When I was an undergrad, one of my business professors told my class that unless you decide to join a big name hedge fund, just invest in broad market index funds and ETFs, and take the time you would have spent staring at charts towards learning three things. One thing that's useful, one thing that's interesting, and one thing that's just plain fun.
This is incredible advice.
He was right.
Was your professor John Bogle?
Please. Jack Bogle
My man, coming out with bangers day after day. Whenever I have the urge to twiddle with my portfolio I go adjust my fantasy football team instead.
Refreshing to see this type of channel on RUclips. Great research driven advice as always, thank you Ben!
I feel so SO lucky to have found this channel as a completely green investor in my late 20s. Thanks Ben!
Glad to see you’re posting regularly on this channel again Ben! Keep up the good work!
Loving these short but info-packed vids Ben!
This is like gettign into "the fast lane" in hravy traffic. You often have watched the lane be fast for almost a minute. But when you get in that lane, it stops being fast after just 10 seconds
Sometimes it isnt like that, but often enough it is.
Since I started watching you guys,😊 I expect my returns to be better in the long run
Brilliant and concise as always. Love the new rythm of videos ever few days! Thanks Ben
I love your channel - your advice is spot on! I also loved philosophical take on money that your shared in some of your videos like renting vs buying and it's impact on happiness - just love all your wisdom and clarity it has brought in my life - finance impacts most aspects of life very deeply 😎
No fluff and great advice! Your channel is incredible
These videos are absolutely gold! Best channel on investing.
Thank you!
gold with which portfolio allocation?
I really enjoy these shorter videos styles. Well done!
One thing I see a lot in online stock forums is people saying "Why should I buy the index instead of these 5-7 best companies?" and those 5-7 "best companies" change every 6 months- 2 years based on which companies have been performing well recently
Liking the frequent uploads!
Great video! I need these reminders to stay on track :)
Ben is on fire !!
Videos after videos!!
Loving it !!
Thank you from Australia
Rent is due
He's back, with a bit more hair all around
@@rundown132 hahaha good one !!
@@CollinLi hahaha that I noticed too
As usual....
Outsttandiinngggggg
Good video - Your comments are bang on.
Yay another video from my favorite financial scientist. Another thing about chasing returns or active management is all the taxes in short term gains too. So even when you do win you'll be handing that win to the govt. I'll tell you though with all the information through The Journal of Finance you'll never run out of stuff to read or content to make from it 👍
Loving your content, Ben! Greetings all the way from Cyprus!
All.of Cyprus is greece!
Buy and hold.
The only way to capture the gains. The majority of gains only come on a few days every year. There is no way to know when those days will happen. Jumping in and out or between funds just increases the chance of missing those days and you will underperform.
Just pick the funds that provide low cost, evidence based indexes at a low cost for the asset classes you need and hold them for the long term.
The only time to switch funds is when your financial plan calls for it or if a fund changes its investment strategy and no longer matches the asset class for which you need it. (The latter is not likely if you are using funds from companies like DFA or Avantis)
Though, I do think a good reason to change funds is after you come to a channel like this one and learn about evidence based investing and decide to switch out of all your high cost, actively managed, stock picker funds and into funds following the Fama-French factor models using low cost, rules based indexes. 🤣
Big thumbs up on another great video with important investment advice. ❤
I disagree. I think buy and hold in this environment can be very dangerous.
@@ChaosDarkLight We will have to agree to disagree then. I believe market timing only works by luck and in the vast majority of cases it fails.
I am convinced that there is no “environment” where a globally diversified portfolio utilizing an evidence based investment strategy (i.e. Fama-French 3 & 5 factor models) would be better served jumping in and out of funds.
IMHO, no one can predict the future. Look at the research. You will see that each year, there are only a handful of days that produce 90% of the gains, no matter what fund you look at. And yes, in hindsight, you can look back and say I wish I was in cash last Monday or I wish I had bought AVUV back in May. But you can never say tomorrow, I better sell XYZ because the Fed will issue its report.
There were a couple of days this year where I made more money in the market than my yearly salary when I started work decades ago.
I could never have picked those days in advance. I simply held my well designed portfolio and I reaped huge gains.
And I’m sorry, the current environment is nothing compared to the 2000-2009. That was a horrible decade. So far, in this decade, my portfolio is up significantly despite last year being poor.
I’ve held to my portfolio, which was designed using concepts preached by this channel and others. 👍
There is no way you could convince me to change course. I don’t care who is calling for the apocalypse. They don’t have any knowledge that the market doesn’t have. They would have to know more than millions of other investors. Good luck.
I will happily hold my portfolio according to my plan. It is already built to handle adversity. It’s gonna go down sometimes. Other times it goes up. And more often it goes up.
✌️😁 peace.
theory of reflexivity
So the lesson is, just buy the poorest performing funds?
Kidding aside, this is another reason why people should stop performance-chasing. Thanks Ben for another short and informative video
There’s actually a paper on that 😂
www.pm-research.com/content/iijpormgmt/43/4/33.abstract
@@BenFelixCSIThis is hilarious, thanks for the link 🤣 really enjoying the new cadence of content, very solid stuff!
I dont have a subscription to this, but did the study actually find its a good idea to go for poor performing funds? Logically it makes sense if the reverse is true.
@@BenFelixCSIWell, the loser has become the winner.
thanks Ben!
As an engineer I really appreciate your clear logic and data driven insights, as usual it cuts against the grain of popular opinions. Having invested consistently since the mid 80s I have experienced first hand many of the topics you have covered in your RUclips videos. Consider doing a segment from your rational reminder series on “the most important lessons in investing”
The Most Important Lessons in Investing
ruclips.net/video/MOjS2zuQMdo/видео.html
Ummm Ben I listen to it repeatedly…share your gifts with the world:) have a nice day
Great advice for the casual investor who thinks he's going to beat the market.
These vids are like a Christmas present…I’ve been good this year 😅
Ark really is the perfect case study for this topic! One of my coworkers fell into the classic trap that you outlined. Bought in at the high and jumped ship when Mean Reversion set in... Is now a good time to get back into Ark?
Thanks Ben! Are these results counter to the efficient market hypothesis? That is, if I chase returns by buying a fund at market value, shouldn't uncertainty about future returns already be priced in? (In an efficient market, aside from fees and churn, it'd be just as hard to lose money on market-rate trades as to gain money, right?)
Great video as always. I am wondering though, I bought IJS when you recommended it a few years ago. When you started recommending AVUV for the same purpose, I kept the IJS I had but bought AVUV for new investments. Although they have a similar investment goal AVUV offered way better performance in the last few years. Is it the kind of situation where holding the loser is better or is it different because in this case they both share a similar objective and AVUV might simply be better?
And thus is why the markets are up this quarter. No money manager wants to be caught end of year without the magnificent seven in their portfolios. Lots of chasing going on.
I just invest in Total World Stocks ETFs and sleep well. International has had lower returns than US stocks but it also has higher expected returns now. Well see.
Your the best.
Could you do a video on so-called swap ETFs like HXT? Would love to hear your thoughts/analysis.
Bah! Just buy one of them 12% funds and you're set ( o3o)👍📈
I'm told they're easy to find if you'll just access them through someone in my referral network and are ok with high upfront loads. 😅
For the uninitiated:
Is an 8% Safe Withdrawal Rate... Safe?
ruclips.net/video/Hhg6dB2UcAs/видео.html
Your random laughs always crack me up lmao
I normally have to wait until Ben says, “in other words…” before I get the joke.
How does the momentum factor fit into the story here? It seems like, on some short time scales, recent performance does indicate future performance, even if it may be hard to capture. Is it just a question of time scale?
Oh that’s a good question. Factor momentum subsumes momentum, so it’s still important to look at the underlying recent factor performance. Valuations also seem to matter in momentum. There is a time scale question on timing exposure to the factors, but lots of other things to consider too.
Momentum vs Value... I have debated this same topic with many factor investing proponents and I never get, in my opinion, a sound answer. No matter how you slice it, Value and Momentum factors propose opposing strategies... so what gives? Diversification via placing opposite bets?
@@BenFelixCSI Interesting! If I understand correctly, you're saying that a lot more goes into a factor portfolio and investors piling into recently successful funds and leaving poor performers do not capture the momentum factor.
@fabeulous that is likely. Performance chasing also involves selling at the wrong time, so a momentum investor would need to have systematic sell discipline to avoid that.
Nicely done. I didn't know the penalty for performance chasing was THAT high.
I've been rebalancing into international and REITs for years now, buying more shares at a low price. Of course that should make a difference in the long term.
PS: one of the rare places where I disagree with you is the usefulness of REITs.
The main point on REITs is that they don’t seem to contribute an independent risk premium. I have nothing against them, but I don’t overweight them beyond market cap weights. They can still be useful though.
@@BenFelixCSI I appreciate your response. When I watched your discussion on the REIT topic I recall that it involved back testing and fitting a non-REIT combination that did ok (but not tremendously well) in simulating REITs. While this is interesting, it does not imply that the same combination will work in the future. Further, if one looks at the wildly changing correlation between REITs and the market over time, the REIT again seems like an oddball.
Indeed, recent history (2022) is telling in that value held up pretty well but REITs absolutely tanked, much more than the market overall.
My conclusion is that REITs are indeed a separate asset class, and one with useful properties.
If performance chasing leads to underperformance, couldnt I simply outperform by inverting the strategy?
Funny enough, there is evidence suggesting that picking losing funds can result in outperformance. But it’s probably more sensible to go up a level of abstraction and target the risk factors that you want in a portfolio directly.
@@BenFelixCSI In that case I'll keep my ARK funds that I'm down +50% on 😅
I do love when people use data, correctly, as a plural word
I set my etfs ups sometime last year and ive been buying twice a week since then
Smart
Great video as always. I had a question, is it better to invest in Index fund etfs or mutual funds when planning for retirement?
Both are fine, although ETFs are more tax-efficient in US taxable accounts. Using diversified low-cost market cap-weighted funds makes the bigger difference.
Ben with the early xmas gifts
How are feed calculated in North America?
In Europe we typically have exorbitant platform fees that will add 0.4-0.5% ontop
What books ya got back there?
Ben, the content that you repeatedly provide us is invaluable. Thank you so much.
I resemble this video
Don't we do the same for index fund investing? S&P long term inclined, so we flock to that
is invesco or any other company that uses swap fee to buy ETF is consider a passive investment?
see.... investing in the stock market using timing does WORK! it generates double digit negative returns.
if only we find a way to short this...
What do you think about dual momentum investing by garry antonacci?
Financial adviser to client: "hey, I've just received this new fund's prospectus. Let's chase that performance and then I'll receive commission, or at the very least will look like I'm working for your money, so you don't leave me to another adviser with a shinier fund." 😄
This feels like a regression towards the mean kind of situation
Win with time in the market, not timing the market.
Great video! I have a question: ETFs like VGT tend to slightly outperform the market while also being diversified across lots of different stocks in the US Technology market, should we also stay away from these type of funds? My strategy would be to allocate 80% VT and 20% VGT.
For some reason I can’t convince myself that VGT will underperform in the future due to the continuous and incredible expansion of the Technology sector and that’s why I wanted to have higher exposure on that by investing in VGT.
You'd only benefit from *unexpected* outperformance. The sector's expected performance is already priced in. You'd be making sector bets based on gut feelings.
Tech is the future. That does not mean it's necessarily a good investment. Stock prices are based on an investors *FUTURE* expectations and future profits. Not on its future growth or importance. If tech companies fail to deliver on that expectation, what do you think is going to happen?
What are your thoughts on the rise of 'Quality Stock' ETFs? Seen a few creators (and investment platforms) promote them due to strong historical performance.
Anything that isn't diversified is garbage. Also if it's being marketed vis creators its even more likely to be trash
Quality/Profitability is the newest "factors". Quality has historically outperformed the market in both up and down markets. Typically the Quality Factor will have higher valuations of their underlying components.
Factors like quality have been evaluated to be persistent over decades and in multiple countries. The idea is that they provide higher returns because they give you exposure to risks independent from market risk. If you're willing to take the risk, they might (or might not) provide higher returns over the long term.
This viseo summarizes is why I automate contributions and don't look at my portfolio. (Thanks for teaching me that Ben!)
Here is a question: if you never sell, then you are never realizing any of the overperformance that may be had by holding some of these funds like small cap value. If you hold it over a 30-40 year time horizon, you will just get the market average regardless, so saying “x fund is up 20% this year” does not mean anything if you do not sell and realize that 20% gain right? Otherwise you just hold it long enough to have the returns eventually revert to the average 7-10%. This makes me think it does not matter if you hold 100% us or 100% international or anywhere between the two as long as you keep buying, do not sell for decades, and “rebalance” with new money
It matters for diversification. If you buy a randomly chosen (adjusted for market cap) individual stock, you will _on average_ get the market return. However, the dispersion of possible returns will be much larger than a globally-diversified market portfolio. Diversification lowers risk and has been called the only free lunch in investing.
I have a hard time understanding how previously high performance in a factor exposure predicts an average lower future performance of that factor, considering that momentum is a well documented factor itself?
Momentum is explained by factor momentum, and the momentum premium is still sensitive to valuation. But a big difference between capturing the momentum premium and performance chasing is the sell discipline.
In broad terms, why does index investing work? If theres a relatively reliable positive expected return from stock indices, why isnt that priced in? Dumb question but cant think of a satisfactory answer.
Good outcomes are not guaranteed in the long-run, and stocks are very volatile in the short-run. It’s a risk premium because it’s risky.
I have spent over 10 years of my investment life looking at this very question and I am as far from a positive or acceptable answer now as when I first started. Reversion to the mean is right through the literature and is most probably the best answer available being the middle ground perhaps. My next best answer is your guess is as good as mine.
Remember to blink! Alas you'll risk suffering from not-blinking-enough-instant-death-disorder!
Hey Ben! I have a question not related to the video; I was wondering what you believe is a safe savings rate to aim for? I've been following The MoneyGuy's Financial Order of Operations (FOO), but replacing Roth with TFSA, and 401K with RRSP. They say to save 25% of your gross income, and I was wondering if you thought that was too low, too high, or about right?
Good question. A single universal savings rate like 25% does not make sense. I’ll do a video on this.
I’m excited for this video
Beard compounding season?
Dang, and I thought the only reason investors don’t make a consistent 12% yearly was because they didn’t pick the “good mutual funds”
I want to invest a lump sum yearly. Statistically speaking, is there an good indicator when to buy for the average investor?
Not really. In the research I’ve done on this, the answer is to invest as soon as cash is available.
To give my personal anecdote, I invested a lump sum in November 2021 (still the all time high for US stocks). The market was pretty obviously frothy around then, so in a situation like that I would probably dollar cost average over a few months.
In your case if you’re getting the money to invest all at once every year, then it’s probably safe to put in all at once. If the money becomes available more frequently than that, then invest it as it becomes available
@@BenFelixCSIhave you tried running a model where a lump sum investment is made only when the market (sp500) is at 52wk low? If not the cash will continue to accrue until it happens
If what you say is true and that current ways of timing the market result in return losses, why wouldnt the opposite strategy result in return gains? Ie buying funds when it's recent past performance was poor, selling when recent past performance was very good, etc.
You sir just discovered value investing.
@@BenFelixCSI enlightenment moment
If many get negative alpha from poor timing, where is the positive alpha going?
Sincerely, a buy and hold investor
I know of one paper suggesting that the wealthiest households do not exhibit this behaviour, while it is exacerbated in the lowest wealth households.
So does it mean, we should buy pooly performed mutual funds?
Just bought myself 3-year, 5-year award winning mutual fund, and suddenly it dropped to last. Sigh.
Ben, why wouldn't you release your clips as podcast too?
You know he has a podcast, right? Rational reminder
I usually do! This one is too new though. But it will make it to a podcast episode eventually.
@@BenFelixCSI on what platforms the podcast is available?
@@lukeh3020 that's different kind of discussions. I'm looking for the RUclips sessions in podcast format to listen on the go.
Beating the average dollar invested in the market is relatively easy = It's the truth.
Ive done this many times myself,,guilty as charged..😆
You’re not alone!
The varying length of your hair throws me for a loop sometimes... but then, there's that constant, steady voice.
Your old microphone setup sounded clearer.
I still have it but that mic doesn’t connect straight to the camera. Easier to edit with this setup.
this is why small cap stock investing is not excatly a good idea anymore
Three videos just this week, Are You OK? I'm getting worried for you Ben.... 👍👍👍
👍😯✌️
"Past performance does not predict future results"
OK, but then what does? We have nothing but past performance. Prediction is looking at _past_ data to deduce future performance. All prediction is looking at past performance. Empirical evidence is past performance. If I touch a stove and burn my hand, that's past performance (and has pretty good predictive results).
While it is interesting and important to note that thematic funds seem to underperform after periods of overperformance (so, here we should not chase past performance), however, the only reason we are investing in the first place is because of past performance. If the stock market had been trending consistently down over the past century there would be no such thing as conservative investment - it would all be completely speculative and every diversified portfolio would be expected (statistically, based on past performance) to lose money.
Chasing past performance and using historical data to test theories are not the same thing.
One good example is value investing. Lots of historical data and strong theoretical underpinning, but not so great recent performance.
@@BenFelixCSI First off, thanks for the reply!
Second, I am not disagreeing with or questioning your actionable advice (of disciplined, diversified, conservative investing), but rather just airing my discontent with the "Past performance does not predict future results" maxim, because in my eyes historical data = past performance.
However, you suggest otherwise. Can you perhaps give a simple, concise explanation why past performance is not the same as historical data? After all, past performance is both data and historical.
@@someguycalledcerberus9805 the difference is that the adage on not relying on "past performance" is with respect to *specific* funds or strategies and looking at their immediate past performance to make buying or selling decisions. If you look at fund ABC and look at its individual performance and make a decision to buy or sell ABC fund, then that is what the data is showing will be suboptimal.
However, if for example, you look at the aggregate of funds across the market (ABC, XYZ, DEF, etc. all together) and use that historical data to form and test hypotheses on generalized market "factors", that is the difference. What Ben is recommending is that one determines the generalized (not fund-specific) factors or principles that will maximize an investor's long term goals, and make fund buying and selling based on how the fund composition aligns with those factors (again, without regard to their individual performance).
His example on value investing is a good example for you. The weight of historical evidence and academic analysis shows that value investing as a strategy will provide good performance. However, as of late, value investing hasn't generated great performance, and so one focused on "past performance" would avoid value investing because of that. However, if one embraced "historical data" instead of "past performance" one would make value investing a key component of their investing strategy, knowing that recent past performance is always subject to the whims of the market. They will trust the theory and know that the weight of historical evidence demonstrates that with sufficient time, there is a high likelihood that value investing will yield much better performance.
Historical data is past performance. It’s how those data are used that matters.
One aspect is the scale of time being tested, another is the pervasiveness of the finding across other samples, and then it’s important for there to be a strong theoretical interpretation of the finding.
For example, we want to test whether there is a risk premium in value stocks.
There is theory in both risk-based asset pricing and behavioral economics that predicts a value premium.
To test the theory we can look at the historical performance of value stocks in the U.S..,where we have lots of data. We can also test it in other countries. We can also test it in other asset classes. Finally, we can create new data sets, for example by assembling previously unavailable historical data from sources like news papers.
This is very different from looking at the 3-year returns of a fund and projecting that return experience into the future.
@@BenFelixCSI Ah, right, that's what I thought too. In this case I simply think that the one-line disclaimer about past performance is a bit inaccurate and overused, because we always must rely on past performance. But thank you for taking the time to reply and for giving a concise explanation of the difference between research and performance chasing. Enlightening, as always, Ben. Cheers!
The ARK Innovation ETF managed by Cathie Wood has no value.
Keep the beard.
In my taxable brokerage, I just DCA on VTI and that's it.
In my tax-deferred accounts, however, I will do a little bit of timing. I saw QQQ/growth take a huge dive in late 2022, so I sold my broad-market stuff and moved into that and enjoyed 40% this year. Now, I'm starting to get a little nervous about how well that's done and am looking for good things that are currently lagging. Equal-weight S&P 500, value, and mid/small cap are on my mind.
Ben, you can blink now and then
Hey Ben , really nice video! I was wondering if I could help you edit your videos and also make a highly engaging Thumbnail which will help your video to reach to a wider audience .
This is what I will show all those people that want to invest in QQQ for their retirement lol
Please drop the vest! Makes you look like a finance bro 😭😭😭
I certainly wouldn’t want to look like I work in finance 😀
Did Ben get into a bar fight?
Finger in the eye playing basketball. Luckily my skin did its job and protected my eyeball.
@@BenFelixCSI Glad you're okay ❤
Buy the dip always works. I'm confused why people are buying high and selling low. Low just means put more money in and you average down to an even better price.
Ben pumping out these videos faster than he pumps the moms of people who buy QQQ and SCHD.
Thanks but how Ben you are doing?? Being a guru let all of us see your P&L then I will believe you and follow you?
You must be a newbie here, right?
The models I use personally and for clients are here www.pwlcapital.com/resources/capital-team-dimensional-global-portfolios-october-2023/
Here's a thought: google "Ben Felix portfolio."
@@BenFelixCSI is there a small cap/value tilt to these? Or is that what the Vector ETFs are? I couldn't really get a clear understanding from the summary prospectus.
I call it the stupidity gap.