Don’t Aim for Mediocrity
03/07/2012 11:00 am EST
Aiming to match the performance of an index almost guarantees disappointing results, says Gregory L. Morris, chief technical analyst at Stadion Money Management.
Should you be using index benchmarking? We’re talking today with Greg Morris. Greg, what do you think about that question?
Well, I don’t think you should. All you’ll ever get is the index returns.
The S&P today is still where it was back in 1998, over 13 years ago. It’s been a rollercoaster ride’up, down, up, down’but a buy-and-hold investor or an index investor would be no better off than they were 13 years ago.
That’s a very long time. If someone were in their 50s thinking about retirement, and here now they’re in their mid-60s and their money hasn’t grown a bit’especially if they were withdrawing money to live on’they’re absolutely devastated with this.
We are trend followers at Stadion. We don’t benchmark, we don’t rebalance accounts. Those are academic finance techniques, and I think that’s what you do when you don’t know what else to do.
But we invest in uptrends, and we try to avoid downtrends. It’s really just that simple, and we’ve generated 16-year returns that generally beat the S&P. Which is comparing us to a benchmark’which you have to do, you have to compare us to the market because you’re invested in equities.
Now, a lot of people do have their retirement accounts with advisors who do use benchmarking. What are some trends that maybe they should be aware of?
Well, I think it depends what they’re benchmarking to.
If their benchmarking to a general market index, the advisor’s going to say, "Hey, we outperformed the index last year by 50 basis points," or whatever, but then the next year the index might outperform them. I like to say that when you beat the index, they call it alpha, but when you don’t beat the index, they call a tracking error.
But the bottom line is, most advisors pretty much hug the index, and they’re generally…I think most index trackers are horribly over-invested. In other words, you can get a diversified portfolio with 30 or 40 stocks, but they’re always chasing the next hot stock and they’re doing it under the umbrella of indexing.
Now let’s talk a little bit about various asset classes. How should people be allocating their portfolio?
There are terms called sector rotation, which could be asset class rotation’same thing’and it’s kind of like what we do in trend following.
When we say the market’s in an uptrend and we’re measuring this technically, then we go in and look at all the ETFs that represent all asset classes, all sectors, all industry groups, etc., and we buy the ones that are performing technically. Breaking it down simpler, if we say the market’s going up because we’re measuring it, and we look at ETFs that are going up, then those are the ones we want to be in.
So it’s kind of a back-door approach to sector rotation. We’re just buying the strong sectors and the stronger industry groups.
Is this something that individual investors can be doing on their own, or do you recommend working with an advisor to identify this strength?
Well, that’s probably a little loaded, since I’m an advisor. I think people certainly have the ability to do it by themselves, but a lot of people won’t put the time and effort into it. It takes a lot of work.
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