The wild ride ahead in stocks
The race is not always to the swift, nor the battle to the strong, but that’s the way to bet –Damon Runyon
2014 was a year of transition, marking the end of quantitative easing in the U.S. and the beginning, in my opinion, of an investment consultant renaissance that could change the way we invest in the future.
Active investment managers failed miserably in 2014. I’ve written a white paper exploring this problem, and posted an Infographic.
Real Deal
There are too many unskilled active managers, in my view, that remain in business because obsolete performance evaluation approaches can’t differentiate good from bad.
In my opinion, most consultants use peer group comparisons but we know now that more than 80% of the managers in peer groups have failed. Consequently, investment managers are evaluated relative to a bunch of losers. Beating the losers is not a win.
Smart beta indexes have attracted a lot of money with their promise of outperforming traditional capitalization-weighted indexes by using computer algorithms to assign alternative weights.
Robo advisors, meanwhile, have amassed a venture capital war chest in the hundreds of millions. Robos provide computerized advice with little or no human contact, at a very low price.
The Fed
Target date funds, with their automated glide path allocations, continued their ascent into dominating market share of 401(k) plan assets, reaching 30%, according to my research.
The Federal Reserve has announced an end to Quantitative Easing, which will lead to higher interest rates. QE is a $3.5 trillion experiment that is not over yet. Its unwinding could have very serious repercussions for the economy and the markets.
At the same time, our national debt has grown to exceed $18 trillion with no ceiling in sight. Each taxpayer owes $154,000 which is about 3 years of the average person’s pay. The current hope is that a Republican House and Senate can reform America’s profligate ways.
Voters need to express their concern. Most of us have grown numb to these exorbitant debts, whistling past the graveyard, so it just keeps getting worse.
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