Smart Money, Dumb Money, and Dumber Money

“Buy low and sell high” is about as cliché as investing clichés get, and so is the sobering reality that most investors fail spectacularly at following this axiom. This Wall St. Journal chart (via Ritholtz over at The Big Picture) provides just one more example of how this works:

Unfortunately, it’s not just a stock market phenomenon; we witness it far too often with CTAs, as well. Investors get into a hot program after it’s had a great run, only to experience the disappointing returns that typically follow the good times. After getting frustrated with mounting losses, investors bail out at the bottom, usually just before the program rebounds and enjoys another period of excellent returns. And on and on the cycle goes…

So we had to wonder whether the traditional behavior of “dumb money” was being broken when we saw Josh Brown’s take on the news that investors are flocking to low-cost index funds. Via The Reformed Broker:

What can we learn from this: Investors are being completely rational and logical. When given the choice between higher-cost, actively managed products and effectively zero-cost passive indexes, they are choosing the latter.

Interestingly enough, the research confirms that they are making the correct choice – especially in a low return, low rate environment.

Who you calling the Dumb Money?

So we have investors being completely logical when it comes to cost, but completely illogical when it comes to timing the market (in at the top, out at the bottom). Seems like they may be focusing on the wrong thing. Consider the mutual fund in the WSJ chart above. It has an annual cost of 0.64%, which is many times higher than Schwab’s U.S. Large Cap index fund’s cost of just 0.04%. But while investors could save 60 basis points (0.60% ) going with the low cost index fund, if they are performing the same mistimed entries and exits as those investors in the Dodge & Cox fund example, they are giving away more than 10% in performance by chasing performance and panicking during downturns.

Now, we’re not saying buy and hold is the answer… we’re just saying perhaps it would pay to apply the same logical approach more and more people are using when considering the cost of their investment to the process of considering when to enter and exit that investment.

But, we’re not expecting to see most investors trade in their greed and fear decision-making traits any time soon. After all, we still live in a world where (South Korean) investors load up on the stock of a pop artist’s father’s company when that pop artist has a hit song. Nothing would surprise us at this point.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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