12/12/2016
By Charles Payne, CEO & Principal Analyst

The market is soaring and you want a piece of the action.  So, you take the plunge without taking too much risk.  Well, you’re not alone.  But I must say, the idea of making a lot of money with no risk is typically called a confidence or Ponzi scheme.

These days, it’s known as passive investing.

Don’t get me wrong. I prefer folks to have exposure to the stock market then nothing at all, even if it’s only passive investing. But the myopic focus on mitigating losses and lower fees overshadow the most important aspect of investing- making a lot of money.

Passive Benefits

• Low fees
• Less tax
• Stable returns

Part of the shift from active to stable investing is the fact that most money managers underperform the market; it’s a problem made worse over the years with so many people getting into the businesses without the proper skills. It takes more than simply hanging a shingle and installing a few trading programs.  Consequently, the exodus from actively managed funds has been mind-boggling.  Beginning around the big market crash in 2001, the switch has picked up serious momentum in recent years.

Through September of this year, there have been $236 billion net outflows of active U.S. funds while passive funds have enjoyed $184.6 billion in net inflows.

Here’s the rub; for the most part, people are playing not to lose rather than playing to win, which is not unlike the so-called preventive defense in the NFL. 

You own all the names in an index for the sake of balance, so known laggards act as an anchor. Think about the Dow Jones Industrial Average, which is up 13%; its top five weighting (based on share price) are up significantly more. In fact, if you simply owned the top five names, you would be up more than 23% this year:

• Goldman Sacks (GS) +34%)
• 3 M Company (MMM) +18%
• International Business Machines (IBM) +21%
• UnitedHealth Group (UNH) +36
• Boeing (BA) +8%
• Top 5 Index +23.4%

The main point to understand: if you take the extra step to be more involved with your portfolio, you wouldn’t have to worry about fund managers and you wouldn’t have to quibble over fees. More than likely, you would beat the Street.

I know there is research saying that individuals can’t beat the market, but it takes into account that people buy one stock to see how it goes or those who become too greedy on the upside and are too afraid on the downside.  If you are looking to make money in the market, you have to take the bull by the horns.

Roadmap

The market has made such a great move; there is no doubt it is due for a hiccup. In the grand scheme of things, investors must be concerned with the next one, two, even three or four years.  On that note, the same experts that called for a market crash and predicted the market would turn lower day after day -have decided this is a honeymoon rally that ends on Inauguration Day.

Please don’t get caught up listening to the guys that always get it wrong; it’s partly because they’re focused on the wrong things in the first place.

Charles Payne
Wall Street Strategies

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