Index Funds and Robo Investing
Index investing is simply following exactly what the index does. Robo investing is akin to robotic investing with minimal human input, merely using software to make decisions. John Bogle, the founder of Vanguard, recommends selling all individual stocks and investing in low-cost index funds. This approach has worked well for the past six years because there have been zero market wrecks. Notice Exhibit 5 showing the significant growth of index fund assets since 2005.
Much of what good investment managers do centers around helping people overcome their own bad emotional behavior. Indexing is based on buying the whole stock market and then doing nothing. The problem is “doing nothing.” As an example, if the overall stock market were to fall by -20% and your industry wasn’t doing so well, the investor would still say “Don’t worry about buying and holding an index or robo fund.”
Then, months go by and the market is down -30% and your spouse says, “I’m worried about this; we need to stop and think.” Six to eight months later, the market is now down -40% and all of a sudden, the investor looks backwards and feels reckless. They are also in a state of emotional weakness, so they sell out. This ingredient is the missing element of investing in index and robo funds.
At this point, a good professional advisor can help keep investors where they should be. Results over the past six years, using the index approach, has been favorable, but it likely won’t last forever. Indexers fail to realize this. It will be a tough time at some point because everyone around you is losing as their emotions also take over. Maybe you think you can resist these forces, but so does everyone else. In point of actual fact, the dominant determinant of long-term investment outcome is based on investor behavior. Without behavioral counsel (for which there is a cost), human nature will fail most investors.
The First Six Months of 2018
At Oxbow, we feel we’re doing a good job of steering our investors through a most difficult and confusing time in the stock market. In our April 2018 Market Comments we labeled 2018 likely to be a year of transition where returns are noticeably lower than they were for the bulk of the nine-year bull market that began in early 2009. The investment environment is full of mixed signals that suggest the bull market is well along in its maturity stage and is tired. Our current fixed-income portfolios have outperformed, and our equity portfolios have performed in line with the overall stock market despite our decision to hold higher cash reserves. This conservative strategy has helped to more effectively manage risk.
In our opinion, the next two quarters of this year will be important for investors. During this time, we should start to see if the economy is really coming alive or if it had just one burst of energy earlier in 2018. For now, we intend to keep our investment strategy defensive and continue to seek out opportunities.
We wish you all the best during these summer months.