ITA Wealth Management

The following information is a great follow-up to my prior post on the advantages of passive portfolio investing.  Think about the following three questions and see if you can come close to the correct answers.  Here goes.

1. What percentage of stocks beat their benchmark index over their lifetime?  Lifetime defined as 1983-2006.

2. What percentage of stocks have a negative return over their lifetime?

3. What percentage of stocks lose essentially all of their value?

Below are the findings of Eric Crittenden and Cole Wilcox of BlackStar Funds.

In answering question #1, what percentage of stocks in the Russell 3000 beat that benchmark, did you write down 64%? Wow!  Sixty-four percent or the majority of the stocks in the Russell 3000 were not able to outperform the index.

The answer to question #1 likely prepares you a bit for the second question. What percentage of stocks have a negative return over the period studied?  If you answered 39%, you were correct.  Nearly 2 out of ever 5 stocks is a bad investment.  Amazing.

And now for the third question.  Over the twenty-three year period, what percentage of the stocks in the Russell 3000 essentially lost all their value?  Try 18.5% or nearly one out of every five stocks was a poor investment.

Below I provide a link to the paper.  Note that 25% of the stocks in the Russell 3000 account for all of the market gains.

Go to this link and look for “The Capitalism Distribution” research paper.  Click on the link at the right.  Here you will find more information including some revealing graphs.  Take special note of the fat tails in the graphs.  If you are a stock picker, do it with the utmost care.

Lowell Herr

Photograph:  Hand carved automobiles by Howard at the Ringling Bros. Museum in Sarasoto, FL.

Of the ten portfolios (I have yet to report on three) I am actively tracking, all ten are “passively” managed and all ten are outperforming their VTSMX benchmark.  While this is a limited number of examples, and the age of the oldest portfolio is only eight years old, the data is beginning to mount in favor of passive vs. active investing.  There is an abundance of data to support this argument.  Just read Hebner’s book for more evidence.

I define a passive portfolio to be one where there is little or no active management.  There is a plan for the portfolio and this should occur before any investments are made.  In actual practice this is rarely the case.  Following the plan, investments such as index funds, ETFs, stocks, and bonds are used to populate the portfolio.  Once the plan is in place and the portfolio is fully populated, then the portfolio is on automatic pilot.  Yes, one does need to rebalance the portfolio every one or two years, but this can generally be accomplished by using dividends and new cash to keep the asset classes in balance.

For the portfolios I am tracking, I currently use Quantext Portfolio Planner (QPP) to aid in the development of a Strategic Asset Allocation (SAA) plan.  There will be times when I apply Tactical Asset Allocation (TAA) methods and this is a move away from a passive portfolio.  There are at least two of the ten portfolios where almost no trading occurs.  The oldest passive portfolio averages approximately two trades per year.  This is one buy and one sell order.  That is about as passive as it gets.

When I apply TAA, I try to explain the reasons for doing so.  Those details are available on the Premium side of the blog.

Lowell Herr

Photograph:  Taken about a year ago, bumbees were not plentful this past summer.

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